My mother, a uk resident, has owned a small property that is…

Hi again.

For the purposes of my answer, I'll assume an ownership period of 336 months (28 years), occupation by your mother for 12 months and letting for 324 months.

If the property is sold for £185,000, there will be a gain of £155,000 (£185,000 - £15,000 - £15,000). The gain for the period that your mother lived in the property after she bought it plus the gain for the last 36 months of ownership will be exempt from Capital Gains Tax. That accounts for £22,143 (£155,000 / 336 x 48). The remaining gain of £132,857 is that part of the letting period gain not covered by the last 36 months of ownership.

As the property has been both your mother's main home and let she is entitled to a further deduction from the taxable gain called letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £22,143 and

3 the letting period gain of £132,857.

Letting relief of £22,143 will reduce the taxable gain from £132,857 to £110,714 and the annual CGT exemption of £10,600 will reduce it further to £100,114.

There are two rates of CGT, 18% and 28%. The rate or combination of rates your mother will pay will be dependent on the level of her income in the tax year of disposal of the property. Assuming the property is sold in the 2012/13 tax year, the following will apply:

If her income in 2012/13 including the taxable gain is £42,475 or less then all the taxable gain will be taxed at 18%.

If her income in 2012/13 excluding the taxable gain is more than £42,475 then all the taxable gain will be taxed at 28%.

If her income in 2012/13 excluding the taxable gain is less than £42,475 but more than £42,475 when the taxable gain is included then part of it will be taxed at 18% and part at 28%.

Assuming your mother is on the basic state pension of £107.45 per week her annual income will be about £9,587 once the rental profit of £4,000 is added. If she is already over 65, none of her income will be taxable as it will be covered by the personal allowance of £10,500. Of the gain, £34,370 will be taxed at 18% (£6,187) and £65,744 will be taxed at 28% (£18,408) which adds up to a CGT liability of £24,595.

If she is not 65 until after 5 April 2013, she will pay tax on about £1,482 of her income which will leave £32,888 of the basic rate tax band unused. Of the gain, £32,888 will be taxed at 18% (£5,920) and £67,226 will be taxed at 28% (£18,823) which adds up to a CGT liability of £24,743.

You will need to adjust the final figures for the total number of months of ownership, occupation and letting. The tax office may ask for proof of the cost of improvements (not simple repairs). If that cannot be done, they may disallow some or all of the £15,000 spent on such improvements. There are some useful notes on CGT and the main residence here.

Let me know if you have any further questions.