Q I am in the process of selling a property to buy another and I am a bit confused about whether capital gains tax (CGT) will apply, so I was hoping you could maybe help clarify this.
Here’s the situation: I bought my first and only house in July 2021 for £280,000 in cash.
I then lived in it 10 September 2022. From then until (a predicted) 31 March 2024, it was rented out to a family. I had moved out to live with my partner during that time.
The rent I receive is £1,100 a month (minus a 10% agency fee). I declared my rental income (for the period of September 2022 to March 2023) as part of my tax return for 2022-2023 (£18,000 with all other income). I will declare my rental income (April 2023 to March 2024) as part of my next tax return. My total predicted income for 2023-2024 is £20,000.
I will most likely be selling my house for £310,000 at the end of March. The house is valued at £330,000 but I’m trying to sell it quickly to secure my dream house.
Do I have to pay capital gains tax and, if so, how much?
NK
A If you had lived in your house for the whole time you owned it, there would be no capital gains tax bill because you would have benefited from what is called private residence relief, which makes the whole gain on the sale of your home tax free. But because you let out the property – and so didn’t live in it for the whole time you owned it – you only get part private residence relief and so may face a CGT bill.
However, I can’t say how big it will be. That’s because to work out the size of the gain you have made, you take what you got for the property less the costs of selling it (which I am ignorant of) and then subtract the price you paid for the house less your buying costs – such as stamp duty land tax and legal fees (ditto). This gives you your gain – or if it is a minus figure, your loss.
To work out how much of this gain is taxable, you then need to work out the percentage of the gain that is exempt. Take the number of months you lived in the property and add nine (or in certain special cases add 36) In your case this seems to come to 24. Then divide that by the total number of months you owned the house (33 in your case) and multiply by 100. That percentage of your gain is CGT exempt, and there will be tax on the remainder only if it exceeds the annual exempt amount for CGT of £6,000 (in the 2023-24 tax year).
You can make your life slightly easier by using the government’s online CGT calculator once you have sold your house. You won’t need to fill in details of your rental income.
Finally, you may want to rethink putting your house on the market for less than its market value as this could be misconstrued as doing so to reduce the CGT bill. The figure to use for the CGT calculation would then be whatever the new owner was prepared to pay for the house less selling costs.
