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Any way to reduce CGT on let property?

Tax | Capital Gains Tax Helpful? 13

Asked by willgan, submitted 27 September 2012.

Open Quote My wife and I bought a flat in 1990 for approx £90K which we let until recently when on retirement we moved into it. However the area is not as it was and we would like to choose somewhere else instead.

Today the flat it is valued at about £240K after agents and legal costs. Are we to be taxed on the entire difference of £150K (apart from the standard CGT allowance of around 22K) as the bulk of the 'gain' is due entirely to inflation and so not a gain at all?

This seems most unreasonable and will discourage long term holdings which is counter to the supposed originally announced intention of CGT to catch the get-rich-quick brigade. Also it means the legislation is retrospective and perhaps thereby a worrying precedent. If this large tax charge is in fact the case can it be deferred by rolling it into the bungalow we would like to purchase and thus only be payable on our deaths or further removal?
End Quote

Answered by Justin on 28 September 2012

Once upon a time you could take inflation into account when calculating capital gains. This was achieved by increasing the purchase price by inflation up to the sale date, a system called 'indexation'.

However, this was abolished in April 1998 in favour of a system called 'taper relief'. Under taper relief the amount of gain subject to tax reduced (by up to 40% for personal assets and 75% for business assets) the longer you held the asset. Assets owned on 31 March 1998 could also benefit from indexation allowance up to that date provided they were sold before 6 April 2008.

Taper relief (and indexation to 31 March 1998) was scrapped from 6 April 2008 and replaced by a flat capital gains tax rate of 18%. So while there was no longer any provision to take account of inflation, the rate was much lower than in the past to compensate.

The introduction of an additional 28% capital gains tax rate from 23 June 2010 (for higher and top rate taxpayers) went somewhat against the spirit of the original move to a low flat rate, but as it's still less than the higher and top rates of tax there's not much room for complaint.

However, if the capital gains tax rate rises in future, perhaps to income tax levels, it would start to look very unfair that inflation is no longer taken into account. But Government's tend to be less focussed on what's fair when they're broke!

Moving onto to your property, you can't roll-over the gain into another property but there's potentially a small amount of good news.

Because the flat is now your main residence you could benefit from private residence relief. This will be proportional based on the period of time throughout ownership it's been your main residence, although you can automatically include the last 3 years provided it's been your main residence at some point.

So if we assume you've owned it for 22 years and it's been your main residence for 3 of those you'll get relief equal to 3/22 of the £150,000 gain, i.e. £20,454 (the calculation should actually be carried out in months).

However, because you let the property you can also qualify for letting relief, which is calculated as the lower of:

- the amount of Private Residence Relief already calculated, or
- £40,000, or
- the amount of any chargeable gain you make because of the letting (calculated as a fraction of the gain - the fraction being the period of letting/divided by the period of ownership).

In your case the private residence relief of £20,454 seems to apply, giving a total of £40,908 relief. This leaves a chargeable gain of £109,092 from which you can deduct available capital gains tax allowances.

Please bear in mind my calculations are for illustration only. You'll need to calculate exact figures yourself or use an accountant to do so.

More details on private residence relief in this HMRC helpsheet.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by willgan at 6:50pm on 30 Sep 2012:

Thank you for your clarification Justin. The government seems to have forgotten that the original justification for CGT was to catch the 'get-rich-quick' guys (eg those who made an overnight killing on shares or currency movement), but the 'real' investor ie the ones who bought and held, and so were not simply speculators, would be protected from paying tax on inflation. The lower rate is good for the the speculator, but not for the buy and hold investor, in our case a property bought for our retirement, since the effect of inflation over 22 years is of course rather large. Other countries recognise this by 0% (or a low figure) for holding for 10 years plus, say. This new approach in the UK encourages both speculation and the government to inflate away (which is probably what will happen with QE)

Our estate agent couldn't believe that indexation relief would not apply to inflation prior to the announcement of the change and felt if this is the case the market would seize up for property which has been held for any significant length of time. Perhaps some lobbying is called for or does fairness not count anymore?