CGT on previous main residence

bobski78 · 31 May 2019 at 1:02AM

Hi,

Can anyone help me out and let me know if I'm on the right track here please? Any help much appreciated.

Sorry it's quite long winded but I wanted to show how I was working things out..

In 2015, I moved to a new house but kept the property I was moving from to rent out. With the upcoming changes in CGT and the reduction in relief on the mortgage interest, I think it might make sense to sell the old property before April 2020.

I bought the original house at the end of May in 2009 for £180,000 and lived in it as my main residence until September 2015. At that point, I remortgaged and bought a new home. Tenants moved into the original property on 1 October 2015 and are currently still there. Their current tenancy will be up for renewal on 1 October 2019.

The original property has an estimated value of £360,000 today.

Assuming a sale date of 1 October 2019 (I know it's unlikely to happen that quickly but that is the earliest possible sale date given the current agreement with the tenants), I have made the following calculation for CGT likely to be owed:

Purchased at 180,000 in May 2009 and 'sold' for 360,000 on 1 October 2019.

Cost of purchase was approx 10,000, cost of sale I've estimated at 3,500 (is that reasonable?).

So that's a gain of 166,500.

I lived there for 75 months out of a total 124 months owned (rounded up to nearest month).

It's been rented out for 48 months.

So PRR of 75 + 18 months (is the 18 months valid if the property has been fully let still sold?) is 93 months.

166,500 * (93/124) = 124,875

Gain after PRR = 41,625

LR: Let for 48 months but reduce by 18 months due to 18 claimed in PRR, so 30 months. 30/124 = 0.24

Letting gain = 0.24 * 41,625 = 40,282

Min of PRR, Letting Gain or 40k is 40k.

So LR = 40,000.

41,625 - 40,000 = 1,625

CGT Allowance of 12,000

So the Chargeable gain is 0 and nothing to pay.

With the rules changing in April 2020, my understanding is that I will only be able to claim 9 months additional on PRR and no letting relief.

So that changes the calculation. Moving the sale date on to 1 October 2020:

Months owned: 136, main residence: 75 (+9), rented out: 60.

PRR: 166,500 * (84 / 136) = 102,838

Gain after PRR = 63,662

Chargeable gain: 63,622 - 12,000 (allowance) = 51,662

Higher rate tax so: 0.28 * 51,662

To pay: 14,465.36

Does this look right? Have I interpreted the CGT tax changes correctly?

If so, it looks like selling prior to April 2020 is the best option.

To slightly complicate matters, selling before October 2022 would mean paying mortgage penalties:

1/10/2019 8046.736
1/10/2020 6035.052
1/10/2021 4023.368
1/10/2022 0

Any thoughts welcome!

00ec25 · 31 May 2019 at 1:21PM

bobski78 wrote: »

Does this look right? Have I interpreted the CGT tax changes correctly?

yes and yes.

the impact of the redemption penalty is simply a question of playing guessing games of
* rental profit (allowing for mortgage interest rule change for higher rate taxpayer as you appear to be) for the extra period
compared to
* CGT bill and redemption costs.

There will be a mathematical breakpoint

bobski78 · 31 May 2019 at 11:52PM

Excellent, thanks for the reply.

I've been putting the numbers into a spreadsheet and think I can calculate the impact of selling at different dates, though it assumes no tax changes, that rent is received at the current rate and that the sale value doesn't go up or down...

Whilst selling after April 2020 causes a drop in return compare to selling pre April 2020, it seems to recover within a year or two to similar levels.

Durban · 26 June 2019 at 4:41PM

Bobski78 - can I ask a question please as situation is similar to mine.

Will you be giving notice to your tenants at the beginning of August and then putting on the market , assuming they leave on time at the beginning of October or will you be needing to do a bit of work on it before putting it up for sale and if so , what date will you put it on the market.

I only say this because I am in a similar situation and the market where I live ( East Anglia ) is extremely quiet at the moment and well priced properties taking ages to sell. My tenants 6 month AST is up for renewal also in the middle of October.

My concern is that , if it is put on the market say , middle to the end of October , sits for 3 months plus before a sale , it is cutting it fine to have it all to have gone through beginning of April 2020.

You ( and me ) may be in the unfortunate position of not only paying the extra capital gains tax but also the redemption fee.

bobski78 · 19 July 2019 at 4:26PM

Hi Durban,

I'm still undecided on what to do and as your post highlights, time is of the essence. I'm undecided for several reasons. Reasons for keeping:

a) the property was intended to be a long term investment and I'm wary of 'cashing in' now - I still have 25+ years till retirement and had planned to use the property for retirement funds.

b) I have a young family that might benefit from having somewhere to live in future should they wish to leave the family home and property ownership becomes even more difficult for young people over the years.

c) the property is still making a monthly profit. It's not huge, but it allows me to pay off a few hundred from the mortgage each month plus retain another couple of hundred for profit. That will reduce down a bit with the reducing mortgage relief.

d) Housing market currently is very unsettled so may take a while to sell and may not get the best price, particularly given the need to sell by a specific date.

e) Mortgage redemption penalty

Reasons for selling:

a) The obvious one - the reducing mortgage relief and the new CGT tax rules hitting profit.

b) I'm thinking that buy to let and taxation is a situation that is not going to get better - only worse. I can't see taxes being reduced so expect costs to go up and possibly even further taxes being levied.

c) Some available cash right now would be very handy with work on our main property. Would mean we could start enjoying this property now while the family is young rather than spending the next couple of years working at weekends etc on diy. The work required could be outsourced and would still leave a significant sum.

I need to decide before the start of August so if I plan to sell I can give 2 months notice to my tenants. I'm going to contact the estate agents and get a valuation so I can at least reduce the amount of guesswork in the calculation on that point.

I plan to speak to the agent and stress that any sale will need to be completed by March 2020. They will have their opinion on how likely that is to happen, which will be useful but taken with a pinch of salt given their own interest in me selling the property.

I think if I decide to sell and there's been no interest after 3 months or so I will take it off the market and hold on to the property for several years, probably more, till the effect of the tax changes has reduced. The risk there is that I will have lost the current tenants, who have been very good (corporate tenant, have a cleaner, maintenance man and only use the property outside of work hours during the week).

In my calculations trying to predict the effect of selling at different dates, selling after April 2020 reduces the profit significantly for a couple of years as expected, but it does recover after that to similar profit as selling before April. That's a result of the ongoing profit from rent, overpaying the mortgage so reducing the loan amount and the mortgage redemption penalty tapering off. That is of course based on various factors: tax, rent, price etc all staying the same over those years which may not be the case.

Also, my thinking is that you don't have to accept any offer on the property unless you want to i.e. depending on how long till the April 2020 deadline, whether the offer comes from cash buyers etc and make a judgement at offer time.

CGT on previous main residence

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