I rent out the only property I own - would I be liable for CGT?

dcrooz

I rent out the only property I own - would I be liable for CGT?

I own a property (just the one) and currently rent it. Would I be liable to pay CGT on this property because it is a rental property or would I not due to the fact that it is my only property?

Many thanks,

lipidicman

Need more info. Do you live there? Do you mean will you pay CGT when you sell it? You will pay income tax on the rent I believe

Twopints

As Lipidicman says, you would only pay CGT when you dispose of the asset i.e. the property. Then you only pay tax on the gain, and the gain is (roughly) what you receive less what you paid. From this sum you can also deduct certain expenses relating to the purchase and sale. Then there is taper relief based on how long you have owned the asset.

The fact that this is the only property you own does not, in itself, exempt it from CGT as a "principal private residence" because there are other conditions to meet: see this leaflet for more info

Basically you need to have lived in the property for the period that you owned it for it to be exempt.

Bear in mind that you also have an allowance of £8200 that can be taken off the gain before calculating tax. If the property is jointly owned(?) you may be able to use more than one allowance.

So, calculate the gain:
What you paid, less what you (think you) will get.
Then deduct fees for buying AND selling (allowable costs) [ This includes estate agent fees, solicitors fees, stamp duty etc]
Then, if purchased before 1998, adjust for indexation (inflation)

Is the gain more than the allowance, £8200. If no, you pay no CGT.

If yes, apply Taper relief. E.g., if you have owned the asset for 10 years or more, then you pay tax on (The total gain less £8200) x 60%. This varies from 95% down to 60% based on how long you have owned it.

You pay CGT at your highest rate of income tax.

I need a pint (or 2) now! I disposed of a flat in 2002 that I bought in 1990 and let out since 1993. I paid no CGT by ensuring that I used all of the above allowances and reliefs. HTH

Richie(UK)

Hi d,

How long have you owned the property?
How long has it been let for?

Twopints is broadly correct in saying "Basically you need to have lived in the property for the period that you owned it for it to be exempt.". However, note that there are certain periods that are deemed to qualify - for example, the final 36 months of ownership automatically qualify for relief.

You should also note that there is an additional relief that may be applicable here - Letting Relief.

You can see a (outdated) Revenue HelpSheet here.

HTH

dcrooz

Thanks Richie, and Twopints (had one or two myself...).

I've owned the property for 2 years and it has been let for 22 months. I was considering selling it now but circumstances are dictating that I may require it as a longer term investment than I had anticipated.

So basically I'm paying tax on the rental income, and despite the fact that it will be the only property I own I will still have to pay CGT on the profit I make from the property price (assuming I make one)?

So taking your example twopints, i might pay 40% (being the top rate of tax I currently pay) on anything between 60% and 90% of the profit (difference between what I paid and what I sell it for minus legal fees, estate agents, etc... (is the initial stamp duty tax deductable??))?

Many thanks

dcrooz

Sorry, I missed your point about taper tax relief - does that only come into effect after 10 years?

Out of interest do you know how long it would have to be classed as my main residence (despite it being my only property) before it would become CGT exempt?

Thanks again!

:beer:

Twopints

Taper relief does what it says on the tin i.e. it tapers:

YR 1-2 100% of gain (less the £8200 allowance) is taxable
yr 3 95%
yr 4 90%, reducing by 5% each year until
yr 10 and beyond 60%

From the Inland Revenue leaflet CGT1: (click here to see leaflet CGT1 )

"What if I sell my home?

No chargeable gain arises if all the following conditions are met:

- You bought it and made any expenditure on it, primarily for use as your home rather than with a view to making a profit
- Throughout the period that you owned it, it was your only home
- You did actually use it as your home all the time that you owned it
- Thoughout the period that you owned it, you did not use it for any other purpose than as a home for yourself, your family and no more than one lodger
- The house and garden do not exceed half a hectare (about one and a quarter acres)"

While some of this may be open to interpretation, I think points 3 & 4 are the ones that will catch you.

Indexation (for inflation) does not apply as this is only for purchases before 1998. I did not know about "Letting Relief" so you may need to look into this and the other point that Richie has raised. Stamp Duty on the purchase - I believe this is deductible from the gain.

If you are paying tax on rental income, ensure that you are offsetting all the expenses that you are allowed e.g. Interest on mortgage payments, letting agency fees, repairs and renewals, other letting expenses (legal etc).

telly-addict

dcrooz wrote:

So taking your example twopints, i might pay 40% (being the top rate of tax I currently pay) on anything between 60% and 90% of the profit (difference between what I paid and what I sell it for minus legal fees, estate agents, etc... (is the initial stamp duty tax deductable??))?

Many thanks

The initial stamp duty and legal fees are added to the cost of the property to give your base cost. Similarly the estate agents fees, legal fees on sale are deducted from sale proceeds.

Twopints

That was a much snappier reply ! Memo to self, keep the answers short .

dcrooz

I know this is going to sound like a stupid question but can I calculate my interest on mortgage payments as follows....?

total mortgage payments - balance of debt paid off = interest payments

so, for example on a £100,000 mortgage where you've been paying £500 a month for the last two years the calculation would be as follows (assuming the remaining balance on the mortgage is around £96,000)...

£12k (£500 x 24) - £4k (£100k - £96k) = £8k

So in this example you could offset another £8k before you even get to the £8.2k CGT relief?

Is this right or are my barking up the wrong tree...?

dcrooz

Sorry - I just realised that it was a very stupid question. The offsetting of the interest on mortgage payments is for rental income only....

doh!