Last year my wife and I took residency in Spain. We have two properties in the UK currently rented out. My main residence, which I bought in 1974 for £7,000, is now worth about £180,000 and has been rented out for 18 months to date. However, when the current tenant moves out it will need upgrading, so it may be cheaper to sell it on as is. My question is, if I sell this property for £180,000 and buy a cheaper property for, say, £140,000, will I pay capital gains tax (CGT) on the difference? And if so, how much?
Arthur Weller replies:
If you sell the ex-main residence for £180,000, you will be liable to capital gains tax (CGT) on its sale; it is not relevant that you are buying another property for £140,000. The CGT liability is based on the difference between £180,000 and the value of the property in March 1982 (not the £7,000 figure you paid for it in 1974). For argument's sake, let’s say the March 1982 value was £10,000, so your capital gain is £170,000. Let's also assume you sell in March 2022, so you will have owned the house for forty years since March 1982. This equates to a gain of £4,250 per year. The last nine months of ownership of a main residence are exempt from CGT, as is all the period you lived in the house as your main residence. Let's say March 2022 will be two years since you moved out and started to rent it out. So, your CGT liability will be 24 months less nine months, which is 15 months. If the gain is £4,250 per year, your taxable capital gain for 15 months will be £5,312. This is less than the CGT annual exemption, which is currently £12,300. So you would have no CGT to pay.