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Calculating capital gains tax on rental property

Rental properties are subjected to tax like any other commercial enterprises. If you had a rental house and moved out of it, you may choose to rent it out or to sell it. The law is very considerate for homeowners. Owners of flats are assumed to be of moderate financial incomes and are therefore not pushed to the wall by tax and revenue authorities. Those who move out from flats are given a relief period during which they can either rent out their flats or sell it. If they rent out their apartments, they will not be subjected to capital gains tax on rental property.

If they sell the flat, the profit they make may or may not be subjected to taxation. Tax relief is granted to those who sell their properties within a certain period of time since moving out. The period is commonly referred to as the “private residence relief final period exemption”. Sale of property after this time period is believed to be premeditated and is subject to taxation by the HM Revenue & Customs (HMRC). The period of tax relief was 36 months before 6 April 2014. It has been changed drastically since then. The time period remains the same for people who are disabled and those who move into residential homes for care.

How are gains on the sale of a rental flat calculated?

Gains on sale of a rental flat is calculated based on several factors. Most of these factors are reliefs that reduce the amount of tax that is charged on the sale of the property. They are reliefs that are granted by the HM Revenue & Customs to the seller of the rental flat. These reliefs include the private residence relief and rental relief. Private residence relief is a tax relief granted to those who move from rental flats to private homes. It is a token of appreciation for growth from flat ownership to residential property ownership. Rental reliefs are given to those who rent out their flats before selling it out.

The reliefs are included in the calculation of the net profit on the sale of property. Profit on sale is basically the difference between the amount f money lost in the purchase of the property and that gained from the sale of the property. Reliefs and expenses must be put into consideration when calculating net profit. The expenses that are expected in property sales include legal fees, stamp duty, and the cost of renovating the property.

Calculation of private residence relief is a bit complicated. Remember that the legally stipulated relief period is 18 months. To get private residence relief, you must add the number of months you lived on a property to 18 months. You then divide this sum by the total number of months you owned the property. The numerator and denominator of this equation may seem to be the same but are in most cases very different. An individual who lives in a property for two years and sells it after three years of moving out will have owned the property for 60 months but only lived in it for 24 months. The numerator is 24 added to the 18 month relief period. That is 42 months. The denominator will be the 60 month period of ownership. This is basically how net profit on property sale is calculated. 

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