CGT and Letting Relief

DippityDooDah wrote: »

working out my OH self assessment and have a question regarding CGT and Letting Relied that I hope one of you good peple will know the answer to.

House bought in 1997 from Council for 17,500, 70% discount at time so market value was £58k
lived in as family home until 2010. Market value at this time £90k
rented out from 2010-2017 when it was sold on 31/3/17 for £90k.
Deductable costs £2500 (selling fees, solicitors etc)

I have worked out that he has Private Residence Relief for 14.5 of the 20 years he owned it (13 years lived in plus 18 months allowance)

i work out the chargable gain to be on £19,250, which is approx £3850 in tax.

how do i know if we are eligible for Letting Relief? if he is eligible for this it would mean that there was no tax owed?

Also, can CGT be offset against tax allowance? He has only earner £5400 in 16/17 so has not used his full tax allowance.

any help would be very much appreciated.

thank you in advance
DDD x

you have not stated who the owner is but you imply he is the sole owner? I will take as read that you are legally married to each other and that as the property has now been sold it is too late to take advantage of that fact. So the mechanics of a PRR and LR calculation are as follows:

1. Work out the Gross Gain
The gain is the difference between what it cost to buy and what it sells for, less any costs associated with its purchase (eg legal fees and SDLT paid) and costs associated with its sale (eg legal fees and estate agent fees). Although not mentioned in your case, the costs of any capital improvements can also be deducted, but not the cost of any work which is merely doing repairs (the distinction between the 2 needs a separate much longer explanation so I'll ignore it for now).
You should be able to support any amounts claimed as costs by being able to produce original invoices/receipts if HMRC challenge you to do so.

In your case, as there is only one owner, the entire gain is attributable to that person only, so sale price 90 less purchase cost 17,500 = 72.5 less 2,500 costs = Gross Gain 70,000 x your ownership share (you are sole owner so 100% share) = 70,000

all other values are irrelevant. The discount/ market value on purchase is irrelevant, the "value" when let is irrelevant.

that gain spans the full ownership period 1997 - 2017 = 20 years. In reality the period should never be measured in years as that is not precise enough to deal with exact start and stop of letting periods and occupation periods. You should use months (or if you wish, exact days)

2. Claim Private Residence Relief (PRR) amount
If the owner lived in the property as their only/main home they are entitled to claim PRR for that period. if that is the case the PRR automatically also includes the final 18 months of the ownership of the property irrespective of whether it was lived in, let, or remained empty for that final period (for example because the tenant had moved out and it was being advertised for sale, not being advertised for letting).

In your case we don't have the months count, so purely for illustration purposes we'll stick with your year dates meaning as it was let "from 2010" it ceased to be main residence in 2009. Thus, main residence period 1997 - 2009 = 13 years + final 18 months = total PRR period 14.5 years

PRR amount £70,000 x 14.5/20 = £50,750

(Note - "main residence" is a concept rather than a fixed definition, and if in doubt will be judged on the facts of each individual case. The key points are actual occupation with a degree of permanence, continuity or expectation of continuity. Marriage also impacts it.)

3. Claim Letting Relief (LR)
Where a property which has at some point in its ownership been a main residence is at another time let, then you can claim LR for the period it was physically tenanted and any intermediate periods when it was void but was actively being marketed for let. If there is no claim to PRR then you cannot claim LR.
Obviously your evidence to support your claim will be the signed tenancy agreements, your bank account showing rental receipts, your income tax returns declaring the rental profits, and any dated adverts for "property to let". If it was still being let during the final 18 months of ownership you cannot double count that period as it is already included in the PRR so the let period may need to be adjusted to exclude the final 18 months

Crucially, the LR amount is restricted to the lowest value from 3 calculations:
a) the amount of PRR calculated in step 2 above
or
b) the amount of gain calculated for the let period
or
c) The max amount allowed which is £40,000

In your case:
the letting was from 2010 to 2017, but that includes the final 18 months so the let period is 7 years - 18 months = 5.5 years

always do the sense check that the ownership period has been fully accounted for as there may be a period when neither PRR nor LR apply, eg. there may have been a period when the property was not let nor lived in as the main residence, ie. it was merely a second home and thus no relief available for that period. In your case however it is straightforward: PRR + LR equals total ownership 14.5 + 5.5 = 20 !

The lowest LR amount is:
a) PRR = £50,750
b) gain in let period 70,000 x 5.5/20 = £19,250
c) max allowed £40,000

in your case the lowest is b) £19,250

4. Calculate the net taxable gain

Each person who has a share of the gain gets an "annual exempt amount" (the AEA is given in the year of sale only on a use it or lose it that year basis, you cannot carry forward any unused amounts from previous years) and for 18/19 tax year it is £11,700

So in your case, as there is only one owner, the net taxable gain is Gross gain - PRR - LR - (if needed) the AEA = 70,000 - 50,750 - 19,250 = ZERO (- 11,700 if needed)

In other words none of the annual exempt amount is needed as the gain is already at zero, so in this case the sole owner has no tax to pay at all as the liability is relieved in full.

If there was more than one owner the gross gain is split according to the respective ownership share and each person then calculates their own PRR and LR on their respective share. That is however irrelevant for you as there is only one owner.

5. Pay any CGT due
if the net taxable gain is >£0 you will have to pay CGT on it at the rate of 18% and/or 28%. CGT is not income tax, it is not the 20% you seem to think it is.
The calculation is simple but long winded to explain... the threshold for when the 28% starts is the (income tax) higher rate threshold and applies to your "total taxable income" which means your income subject to income tax, less your income tax personal allowance, but plus your net taxable CGT gain.

For example, suppose you have a salary of 20k and a net taxable gain of 40k. Your "total taxable income" will be income subject to income tax (20 - 11.85 income tax 18/19 personal allowance) = 8.15 + 40k net taxable CGT gain = 48.15k "total taxable income".

The higher rate tax threshold for 18/19 is 34,500, so your total taxable income is above that threshold, and thus some of your gain will be taxed at the 28% CGT rate.

The calculation would be this: 34,500 - 8.15 = 26.35k tax at 18% = £4,743
plus
40k total gain - 26.35k already taxed at lower rate = 13.65k @ 28% = £3,822

So for a 40k CGT liability based on someone with 20k of income taxable earnings you'd pay 4,743+3,822 = £8,565 CGT (an effective composite tax rate in this example of 21.14%)

You will declare this calculation on your annual tax return and therefore you have to pay any tax due by the final deadline for a tax return, namely by the 31 Jan following the end of the tax year in which you made the gain, so for a gain made in 18/19 you need to pay by 31/1/20

steps 1 - 5 can be understood in full detail by reading:
https://www.gov.uk/capital-gains-tax

https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64200c

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64738

https://www.gov.uk/government/publications/rates-and-allowances-capital-gains-tax/capital-gains-tax-rates-and-annual-tax-free-allowances

https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2017-18/tax-and-tax-credit-rates-and-thresholds-for-2017-18