Q I bought my flat in 2005 for £280,000, lived in it for one year, then moved in with my boyfriend and rented my flat out. In 2012, almost exactly seven years after buying it, I sold it for £407,500.
From some rudimentary research via the HM Revenue & Customs' website and others I think the last three years of ownership are exempt from capital gains tax. Does that mean that the value of the property in 2009 is vital? If so, can one use nethouseprices to show what similar properties were selling for at that time?
All the maisonettes in my street are virtually the same so it is easy to compare them. Actually the value went down, stayed the same and then rocketed up right at the end. Would this mean I am in the clear? RC
A The value of the flat in 2009 does not need to be taken into account when working out the capital gains tax (CGT) bill you may face. What matters is the overall gain you made and whether you used the property as your main home for at least part of the time that you owned it.
The gain you made on your flat was £127,500 (the sale price of £407,500 minus the purchase price of £280,000). However, not all of this £127,500 gain is taxable because you can claim what HM Revenue & Customs (HMRC) calls "private residence relief". If you lived in a property for the whole time you owned it, the gain would usually be completely tax free (although there are exceptions if you had a particularly large garden or used the property for business purposes – see HMRC Help Sheet 283 Private Residence Relief (pdf) ).
If, as in your case, you started living in the property, then moved out and let it, a fraction of the gain qualifies for private residence relief. This is worked out by taking the number of years you lived in the property and adding the last three years of ownership and dividing that by the total number of years
you owned the property.
In your case, the fraction of the gain that would qualify for private residence relief – and so be tax free – would be 4/7. So just over £72,800 of your £127,500 gain would be tax free (ie £127,500 multiplied by 4 and divided by 7). However, unless you exchange contracts on a property sale on or before 5 April 2014 or are selling a property because you're going into a care home after that date, the calculation to find out what fraction of a gain is tax free is going down. From 6 April 2014, instead of taking the number of years that you lived in a property and adding the last three years, you'll only be able to add the last one-and-a-half years.
As well as being able to claim private residence relief on some of your gain, because you let the property you also qualify for what's called "lettings relief" on some of the remaining taxable gain of £54,700 (total gain of £127,500 less tax-free portion of £72,800). The amount you can claim is limited to the lowest of the following figures: £40,000; the amount of private residence relief you can claim; and the "gain arising by reason of letting" which is calculated by taking the number of years the property was let for multiplied by the total gain divided by the total number of years you owned the property. In your case, you'll get £40,000 in lettings relief thus reducing your taxable gain to £14,700. You can set your annual CGT exempt amount of £10,600 (which applied in both the 2012-13 and 2011-12 tax years when you would have made the taxable gain) against that £14,700, which reduces the amount on which you'll have to pay CGT on to £4,100.
CGT is payable at a rate of 18% if you are a standard-rate (20%) taxpayer; 28% if you pay tax at the higher rates, so your bill may be as little as £820.
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