Advice on Capital Gains Tax
Question: I have just sold my house which I lived in for several years but I also rented it out for a period. Will I have to pay Capital Gains Tax as a result?
You may be liable to pay Capital Gains Tax when you sell or dispose of an asset for a profit. Disposal of an asset for Capital Gains Tax purposes includes selling it, gifting it and swapping it.
Generally speaking, the proceeds that you receive when selling your property (or the market value if it was a gift) less what you originally paid, the costs to sell and any capital improvements you have made, leaves you with a gain (if the figure is above £0) that may be liable to Capital Gains Tax.
There are a number of allowances and reliefs that individuals may be entitled to in relation to Capital Gains Tax when selling property. One of these is Principal Private Residence Relief (PPR) which eliminates any Capital Gains Tax liability for the period that the seller lived in the property, assuming that it was their only main residence. There are, however, some restrictions that can mean that PPR does not apply or may only apply to a proportion of the gain, e.g. if you rented out the property for a period, as is the case here.
If the gain does not qualify for 100% PPR then there may still be other reliefs that you can utilise. For example, as you rented out your property for a period then you could be entitled to Lettings Relief. Lettings Relief is the lowest of the following three figures:
The same amount as the PPR relief; £40,000; or the same amount as the gain made during the period that the property was let.
To calculate the Capital Gains Tax liability on the sale of your property, you must determine exactly how long you have owned it, how long you lived in it as your principal private residence and how long you rented it out. You can then determine the proportion of the gain that is entitled to PPR (assuming it was your principal residence) and the proportion that is entitled to Lettings Relief.
In addition, individuals only have to pay Capital Gains Tax on gains that exceed the Annual Exempt Amount. This is a tax-free allowance which is currently set at £11,700.
If you are still left with a gain after taking the above allowances and reliefs into account, this will be subject to Capital Gains Tax at 28% if you are a higher or additional rate taxpayer and at 18% if you are a basic rate taxpayer and the entirety of the gain falls within the basic rate tax band.
Going forward, there are a number of new proposals that are expected to come into force from April 2020 which will further restrict the use of PPR and Lettings Relief. Currently PPR can also be used to cover the last 18 months of ownership prior to disposal of the property. However, the Government proposal is to reduce this to just 9 months. In addition, Lettings Relief will be restricted to cover just periods of shared occupancy between the landlord and tenant.
If you would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on this matter in addition to other tax, accountancy and business matters. Contact Gemma Newstead on 01424 720222 or email her at [email protected]