Q I bought my flat for £44,000 in February 1997 and lived there alone until February 2011. My girlfriend and I then bought and moved into a new house. I kept the flat and have rented it out since then.
My girlfriend and I are now splitting up and are discussing the possibility of me buying her out of the house we bought together. To finance this, I would need to sell the flat and understand that I will have to pay capital gains tax when I do so.
Will the tax be payable on the profit made since I first bought the property in 1997, or on its increased value since I moved out in 2011? If I were to move back into the flat in the meantime and make it my main home once again, would I no longer have to pay capital gains tax? AM
A You are not alone in hoping that moving back into a property that used to be your home but was then rented out will let you off a capital gains tax bill. Unfortunately, the only way you could have definitely avoided a capital gains tax liability on your flat would have been to sell it within 18 months of moving out of it.
This 18-month limit is what HM Revenue & Customs (HMRC) refers to as the “private residence relief final period exemption”. The exemption was brought in so that people who had to move out of their home but were having trouble selling it wouldn’t face a tax bill on any gain they made. Before 6 April 2014, the limit was 36 months, and that amount of time remains for people who are disabled or move out of their homes to go into full-time residential care.
To answer your first question, tax is payable on the chargeable gain made since you first bought the property in 1997 after subtracting various expenses and reliefs such as private residence relief and, because you let the flat, lettings relief.
First, you need to calculate the gain – you take the amount you sold the flat for and subtract the cost of buying it, which includes the purchase price, legal fees and stamp duty (if applicable) as well as money on improving the property (such as installing double glazing but not routine maintenance costs). That calculation gives you your net gain.
The next step is to work out how much private residence relief you can deduct from the net gain. To do this, you take the number of months you lived in the flat and add 18. Then divide this figure by the number of months you owned the flat in total. Finally, you multiply that fraction by the net gain (see above) to give the amount by which you can reduce the net gain.
Note that if you moved back in after letting but before selling, rather than adding 18, you add the number of months out of the final 18 of ownership not covered by actual occupation. So, for example, if you moved back in for six months before selling, you would add 12 to the number of months you actually lived there.
In your case, if you didn’t move back in and made a net gain of £100,000 in February 2016 after owning the flat for 228 months, the calculation would be 186 (the 168 months you lived in the flat plus 18) divided by 228. Multiplying this fraction by £100,000 gives private residence relief of £81,579, thus reducing your gain to £18,421.
To calculate how much lettings relief you might be entitled to you need to work out what HMRC refers to as the “gain arising by reason of letting”. This isn’t as tricky as it might sound. You take the number of months you let the property less 18 (or the lower figure if you move back in during the last 18 months). Then divide this by the total number of months you owned the flat and multiply this fraction by your net gain of £100,000. Making the same assumptions as before, this would give a lettings relief figure of £18,421 (60 minus 18 divided by 228 multiplied by £100,000). So your lettings relief reduces the gain to zero.
You will find more worked examples of how to calculate gains on a property you have both lived in and let in HMRC’s capital gains tax manuals.
