CGT on rented property

[jabba]

I bought a flat for £105,000 which I lived in for a few months, before renting it out for the past 4 years. I am thinking about selling it for around £170,000 and am uncertain on the formula to calculate any CGT payable. I was working away when I bought it and commuted back every weekend. I then met my wife and am now permanently settled away, although only 150 miles away. I read somewhere working away could reduce the CGT gain.

This year is the first year I've received a tax form to complete. I have never declared the income and my net gain (rental less mortgage payments etc) is around £900 per annum which excludes any maintenance/repair costs that have arisen in the past. What is the taxation issue on this income and will I have to pay 4 years worth of tax on it? I also own jointly with my wife another property which was our PPR for almost 3 years that we have rented out for the past year and am in the process of selling. I believe there will be no CGT on this property but we have made a net gain of £1300 in 12 months which again we have not declared.

[Nigel Lord]

Jabba

Your circumstances have both income tax and capital gains tax (CGT) consequences.

Income Tax

You should have declared the new source of income (net rental profits) by 31 January following the tax year in which it first arose. If you have failed to do this you are potentially exposed to interest and penalties. These are tax geared. The taxable profit is the gross rents less allowable deductions including mortgage interest, commissions, insurance, rent collection charges, repairs & maintenance and a 10% allowance (of gross rents) for wear and tear (or capital allowances).

Capital Gains Tax

The CGT calculation is quite complex and you will need to provide full details. You will be potentially be entitled to the following reliefs (in this order):

Costs of sale (legal and agency fees etc.)

The purchase cost

Costs of acquisition (legal and search fees, survey fees, stamp duty etc.)

Indexation allowance (if bought prior to 31 March 1998)

Improvement expenditure

Indexation on improvements (if undertaken prior to 31 March 1998)

Principal Private Residence (PPR) Relief (For the period of residence and last 36 months of ownership)

Residential Lettings Relief (up to £40,000)

Taper relief (from 1 April 1998)

Capital losses arising in the same tax year

Unused annual exemption(s) (Consider gifting some beneficial ownership to your wife to maximise)

Losses brought forward

PPR relief is computed on a monthly basis. (E.g if you lived in the property for 6 months, then let it for 48 months, then sold it: PPR relief would be 42/54ths of the net gain - 6 months residence + last 36 months over 54 months ownership)

You are correct in assuming that you will have no CGT on your joint property if it is sold within 36 months of you ceasing to reside there.

You will probably need to take advice regarding the income tax and CGT computations and to maximise your reliefs.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk