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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I have owned and lived in my current home since 1990. It is ...

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I have owned and lived in my current home since 1990. It is valued at around £250k. I bought it in 1990 for £96k. I jointly bought another house with my in-laws in April 2007. My wife and I own 45% of this house. In the current market, we are thinking of giving the first property for rent and live in the new house. If we then sell it for say £275k, what capital gains would I be liable for?
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Hello raghu,

Since you are giving prices in British pounds I assume you live abroad. Are you a US citizen?

Customer: replied 6 years ago.
I live in the United Kingdom
Expert:  Merlo replied 6 years ago.
Are you inquiring about what your taxes would be in the UK or in the United States? Are you a US citizen?
Customer: replied 6 years ago.
I am a UK citizen. I live and have always lived in the UK. I am enquiring only about CGT in UK.
Expert:  Merlo replied 6 years ago.

HelloCustomer

In the UK, I am sure you must know that you may exclude all gains from the sale of your main residence. That rule holds true even if you have not lived in the home for the last 3 years before you sell it. So if you plan to rent your current home, if you then sell it within 3 years of moving out and renting the property, then there will still be no capital gains tax due. You would however, have to report the rental income.

However, if the rental period extends beyond 3 years, then the portion of the gain which you may still exclude is figured proportionately. Following is an example:

Say you bought a property in 1993 and lived in it as your main residence for eight years until 2001. Then you bought a second property which immediately became your main residence and the first property was rented from then until you sell the home in 2008, meaning you rented the property for the last 7 years.

Let's assume that when you sold the home your total gain amounted to £210,000. Here is how you would figure your exemption.

Exempt as main residence:

From 1193 to 2001 - 8 years (actual time you occupied the home)
From 2005 to 2008 - 3 years (last 3 years of ownership is always exempt even if you did not live there or the property has been rented.
So you have a total of 11 years that will be exempted.

You take the total of your exempt years divided by the total years you owned the home - so in this case 11 divided by 15 = 73.33%

If your gain was £210,000, then you are allowed to exempt 73.33% from any tax, or a total of £154,000. The balance of the gain is £56,000. BUT, since you rented the property now you are also given another exclusion known as the "residential letting exemption" which gives you an additional exclusion amount of £40,000. So your taxable gain would then be only £16,000.

Again, if you sell the property within 3 years of converting it to a rental, there will be no CGT due at all, as the last 3 years of ownership you are not required to live in the home.

If this was helpful please press the Accept buttong. Positive feedback is also appreciated.

Thank you.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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