Buy to let / lettings allowance query

Pete111

Hi.

I'm hoping someone might be able to give me answer re my likely tax liability in the future.

My wife and I bought a flat in 2004 for 250k. We lived in it until Sept 07 when we bought another property and moved house. At this time we had the flat valued at approx 385k

We kept the flat as an investment (it is currently rented out) and are trying to figure out what our options are in the medium term given that we do not want to pay tax on any capital gains if at all avoidable. At the same time we are aware of the overdue 'correction' in the housing market that appears to be lurking around the corner and need to understand what our longer term options may be, given that historially property, especially in half decent parts of London, is a sound long term investment

I understand that we have a 3 year grace period from Sept 07 in which we can sell the flat and not be liable for Capital gains Tax , but given the potential market issues, we are keen to know what impact holding the property for a longer period of time will have as regards CGT.

I understand also that there is a lettings allowance of up to 40k that can be used to offset CGT that has accrued, but this is only available in some circumstances. I am also aware that the rate of CGT has just been confirmed at 18% from April so am obviously pleased about that.

As such, can offer an opinion on the following scenario: If we kept the flat for 5 years after moving out and its value at this time was say 500k (pie in the sky?!?) How much CGT would we owe on it?

I'm also keen to know whether the CGT element would apply to any growth in value over the purchase price or the growth over the value of the property
when it cased to be our main residence (Sept 07)

Any thoughts greatly appreciated.

Pete111

silvercar

The CGT calculation is based on the purchase price. Relief from CGT for when it was your PPR and the last 3 years of ownership are all calculated in proportion so the value at the point you started letting it is not relevent.

In your example you bought for 250k in 2004, if you sell for 500k in 2012, your gain would be 250k. You would have lived in it for 3 years and would be exempt from CGT for the last 3 yrs of ownership. So of the 8 years of ownership, 6 would be exempt ie 75% of the gain is exempt, leaving 25% of 250k ie 62.5k.

On top of that you would get letting relief maxed at 40k, reducing the gain to 22.5k. Who knows what the value of CGT allowance will be in 2012 (it is currently 9.2k each), it should be at least 10k. So with 2 lots of 10k allownce your liability would be 2.5k, on which you would pay 18% tax ie £450. A good result for a 250k gain!

Pete111

Thanks Silvercar - that's really helpful!

S/C - I've not examined any IHT issues (no kids, only 30 y/o and steering clear of wayward buses...) but would no doubt do so if we decided to keep the flat for a significant period.

Ta

Pete111