Rent or Sell up? Capital Gains Tax Bites!

Fiolondon

Hi

Back in 2000 I bought my first home - a nice 2 bed flat - and got a lodger in to help with expenses.

3 Years ago my boyfriend and I moved in together, while we rented my flat out to friends. 2 years ago we bought a house together, still with flat being rented out and we thought that we would rent it long term and I thought I better teach myself about tax after getting a lumpy bill last year.

I first wanted to get the income tax reduced out by maximising the mortgage interest to offset the rental income, by getting a buy-to-let re-mortgage. The fees on these products seem to be very high - I have been quoted £4-5k for a 2 year fix!

After that I started looking at Capital Gains Tax (CGT). Now that I have used up my 3 year allowable absence, if I continue to rent out the flat, I will have to pay CGT when I come to sell up - based on a proportion of how long I have rented to owned the flat. My dodgy calculations seem to show that would be about £5k for every year I rent it out from now.

So to keep the flat and rent it out for the next 2 years, it will cost me £15k to get £10k rental income....... that doesn't sound good!

It seems to me I would better to sell the flat (even at £15k below valuation) than keep it in a climate where there is unlikely to be any price rises!

Is my basic analysis right?

Any advice gratefully received!
Fiona

silvercar

Though you should have a BTL mortgage on a property that is rented (or consent to lease from your lender) the tax position is the same. Mortgage interest is an allowable expense against rental income whatever the type of mortgage upto the value of the property when it was first let.

Your CGT calculation.

You are exempt from CGT for the time it was your home and the last 3 years of ownership. So at the moment you have no CGT to pay. In a years time you would be exempt fro 8 out of 9 years so would pay CGT on one-nineth of the gain.

In two years time there would be two years that weren't exempt so the CGT bill would be based on two tenths of the gain.

In three years time it would be three elevenths of the gain.

.....

In addition you have your presonal CGT allowance of 9,600 and you have letting relief which is the minimum of:
£40,000;
relief for the time it was your home;
relief for the time it was let.

So I can't see you actually facing a CGT bill for a few years yet.

WTF?_2

Based on what you have said I'd agree with your analysis to sell it ASAP to get the max for it (prices more likely to go down over the coming years than up) and also to take advantage of your CGT tax-free allowance.

EdInvestor

Silvercar is right about oth the mortgage interest and the CGT - the terms are quite different if you are letting out your former home from a normal BTL .It will be some years before any CGT is payable, if ever.