Capital Gains Tax question

[Catweazle]

If I buy a house and move into it, but instead of selling my current house I rent it out, what will my CGT liability be if I decide to sell the old house in a few years time ?

 

Will I have to pay CGT on the capital gain since I first bought the old house (1986) or only on the price increase since it ceased to be my main residence ?

[10WM]

Had to read that a few times, What a good question.

 

An easy way would be to ring HM Inland Revenue, without details of who you are and ask them that question.

 

Or maybe there are some Brains within PW that may know I also just for education would like to know the answer.

[docholiday]

Its the price increase, since it became your place of residence

[Bigweed]

Its the price increase, since it became your place of residence

 

Less an allowance for inflation - I think

[amateur]

Get your current house valued when you move out.

 

You should only pay CGT on the gain between that value and the subsequent sale value .....

 

and consult a chartered accountant conversant with current tax law at the time that you sell it - tax rules change so frequently that unless you are taking advice from someone in the business of saving tax, you are likely to get the wrong advice.

[Kes]

Amateur has it correct I believe. Take the highest valuation you can get in writing - shouldnt cost you anything if you invite estate agents apparently to sell and get them to advise you in writing of their valuaton. There is an in year CGT allowance, small but useful.

Make sure you have a plan if the value of the asset falls, i.e. can you offset?

In the current house price climate, you will have difficulty knowing where you will end up as the value may fall in the short term and increase later so a good tax specialist would be a wise precaution.

[Chris B123]

You dont pay the full percentage for the years you lived there.Plus your allowed £9000 (about 5 years ago). I sold a secound house about 5 years ago and I was dreading the CGT, I was expecting to pay about £18000 but after taking into account the time I lived there and other allowances I only had to pay £2500.

[Catweazle]

Thanks chaps, I'll be sure to get a valuation and some documentary evidence of my moving date.

[ColinF]

You don't need to get a valuation when you move out. The only two figures you will need are what you paid for it, and what you sell it for in the future.

 

The difference between these two figures is the gain that you have made during the period of ownership. The gain is then time apportioned for CGT purposes, and the gain relating to the period of time that you have lived in the property is not subject to tax. For example if you have owned the property for 25 years of which you lived in it for 20 years and let it out for 5 years, only 5/25 of the gain would be taxable. The remaining 20/25 would not be taxed.

 

The last three years of ownership are also not taxable, so the actual split for the scenario above would be 2/25 taxable, 23/25 not taxable.

 

Once you know how much of the gain is taxable, you can deduct £10,600, as the first £10,600 of gains in the current year are exempt from tax. If the property is owned jointly the taxable gain will be split between you, and you can each use the £10,600 annual exempt amount against you half of the taxable gain.

[amateur]

You don't need to get a valuation when you move out. The only two figures you will need are what you paid for it, and what you sell it for in the future.

 

The difference between these two figures is the gain that you have made during the period of ownership. The gain is then time apportioned for CGT purposes, and the gain relating to the period of time that you have lived in the property is not subject to tax. For example if you have owned the property for 25 years of which you lived in it for 20 years and let it out for 5 years, only 5/25 of the gain would be taxable. The remaining 20/25 would not be taxed.

 

The last three years of ownership are also not taxable, so the actual split for the scenario above would be 2/25 taxable, 23/25 not taxable.

 

Once you know how much of the gain is taxable, you can deduct £10,600, as the first £10,600 of gains in the current year are exempt from tax. If the property is owned jointly the taxable gain will be split between you, and you can each use the £10,600 annual exempt amount against you half of the taxable gain.

 

This method assumes that the house increases in value evenly in proportion over the period of ownership, including the rental period.

 

This may not be the case, particularly in the current property market.

 

As I wrote in my original post - take advice from a taxation specialist.

[Dougy]

Doesnt all income need to be included in your total annual income before CGT is calculated, for example if your in full time employment and renting out property, surly its classed as 2 incomes

[John_R]

I was told you have three years after moving out during which time any gains are free of CGT liability. So if you wanted you could wait a while, then put it on the market timing it so you are confident of a sale going through before that 3rd year is up.

[Dr W]

ColinF has the right method of calculation.

 

This is the HMRC Link that will give you all the info you need.

Edited May 31, 2011 by Dr W

[AVB]

Doesnt all income need to be included in your total annual income before CGT is calculated, for example if your in full time employment and renting out property, surly its classed as 2 incomes

 

Income is different to Capital Gains. Yes you would have to declare your rental income (net of expenses) annually and yes you would pay CGT when you sell as ColinF has defined.

[gibby]

Easy way to get out of it would be to move back in to the property before you sell the property, making it your residence again.

[Dr W]

Although you would pay tax on the gain on the period you didn't live in the house (if over the 3 year period)

[Catweazle]

Thanks for the advice guys, food for thought, and it's given me a good idea what questions to ask.

[AlistairB]

i stand to be corrected, but i think you can redefine it as your main residence by paying the council tax - could be wrong, ColinF will be able to advise!

 

AB

[ColinF]

i stand to be corrected, but i think you can redefine it as your main residence by paying the council tax - could be wrong, ColinF will be able to advise!

 

AB

 

Unfortunately, just paying the coucil tax is not enough to make a property your Principal Private Residence (PPR) for CGT purposes.

 

You can only have one PPR at a time, so in the OP's case the new house will become his PPR when he moves into it, and that will be taken into account when calculating any gain when he sells it. As he will be letting out the old house any rent and letting expenses will have to be reported on his tax return, so it will be clear to HMRC that he no longer lives there.