Q I’m confused about the proposed changes in the capital gains tax system for people selling their home when it has been rented out. I’m unsure if it would be wise for me to sell my house now as my fixed-rate mortgage expires in July 2019. My initial plan was to go with a new fixed-rate mortgage for two years (starting July 2019) whilst I retrain in a new career and keep the property let out for the duration. However, I have recently read about the changes to the capital gains tax system which may mean that I could end up paying a large sum of tax when I come to sell my house. So I’m wondering if I should sell my house now to avoid this. I am not attracted to the idea of purchasing property in the area where I’ll be retraining and so if I were to sell I would not be looking to buy another property for at least two years.
I bought my current house in December 2009 for £215,000. I lived in it until April 2016 when I moved out and it has been let since. Around this time the house next door sold for £296,000. I have had a rough valuation by an estate agent who said that my property should fetch around £330,000 in the current market. Two houses very similar to mine have been sold within a week of going on the market so hopefully I should be able to sell quite quickly if I do decide to sell. My outstanding mortgage is around £87,000 and I receive £1,200 a month rent (before tax).
A You are right that there are going to be changes made to capital gains tax (CGT) but if the current proposals go ahead, they won’t take effect until 6 April 2020. So if you manage to sell your house before then, your gain will be subject to the current rules. However, because you haven’t lived in the house for the entire time that you owned it, you may still face a tax bill. That’s because only a part of the gain that will be tax free thanks to “private residence relief”. The proportion of the gain that will be tax free is calculated by taking the number of months you lived in your house plus 18 and then dividing that figure by the number of months you owned the property. When the proposed CGT changes come into force, the proportion of the gain which is tax free will go down. The calculation will be the number of months that you lived in the house plus nine divided by the months of ownership.
In addition, the new rules mean that, as an absentee landlord, the proportion of the gain which relates to the letting of the property and so isn’t tax free will no longer qualify for lettings relief. Under the current system, if you sell property that you let out but which was once your home, the proportion of your gain that doesn’t qualify for private residence relief gets lettings relief of up to £40,000 unless the amount of private residence relief is less than £40,000 in which case, the lower figure applies. So if you made a gain of £100,000, for example, and three-quarters of that (£75,000) was tax free (because of private residence relief), the remaining £25,000 of the gain would be fully covered by lettings relief and so CGT would not be payable. Under the new system, no lettings relief would be available to you as, from 6 April 2020, lettings relief will apply only where an owner shared the occupancy of the property with his or her tenant (or tenants).
You also need to be aware that under both the current rules and the proposed new rules, your total gain is what you sold the property for less what you paid for it and less buying and selling costs. The fact that you have a mortgage on the property has no bearing on how your total gain is calculated. Also, what your house was worth when you moved out and started letting it doesn’t come into the CGT sums either.
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