Selling let flat (ex owner-occupied)- CGT?

[soho_blue]

Rental property board, but may have more luck here.....

my wife and i bought a flat in March 2002 for £109k and lived there for 3 years. It is now worth about £180k. In March 2005 i bought a family home and started to rent out flat. The mortgage repayments on the flat are about £600/month and i recieve, after agent fees / tax, about £680/month.
My long term plan is to rent out the flat until the mortgage is paid off then either sell it or continue to rent it (basically use it as a pension).
To me this seems a good idea as, whilst i dont really make any money on the place every month it will eventually provide me with an income to which i have not had to pay anything into.
Someone advised me that i should sell the flat when CGT becomes an issue and invest the approx £70k profit into something else - like a 'normal' pension. To me this doesnt make sense but im in no way a financial expert. So, any ideas if im missing something ??.
One further thing, am i right in thinking that CGT is payable on the profit you made on the property from the date you moved out - i.e if the value of the place in 2005 was £180k and in 10 years time it worth £200k you would pay 40% on 20k ?? Also, how do you prove the value when you started renting it out. All i have is a written valuation from our agent.
Many Thanks.

[Tax Accountant]

Rental property board, but may have more luck here.....

my wife and i bought a flat in March 2002 for £109k and lived there for 3 years. It is now worth about £180k. In March 2005 i bought a family home and started to rent out flat. The mortgage repayments on the flat are about £600/month and i recieve, after agent fees / tax, about £680/month.
My long term plan is to rent out the flat until the mortgage is paid off then either sell it or continue to rent it (basically use it as a pension).
To me this seems a good idea as, whilst i dont really make any money on the place every month it will eventually provide me with an income to which i have not had to pay anything into.
Someone advised me that i should sell the flat when CGT becomes an issue and invest the approx £70k profit into something else - like a 'normal' pension. To me this doesnt make sense but im in no way a financial expert. So, any ideas if im missing something ??.
One further thing, am i right in thinking that CGT is payable on the profit you made on the property from the date you moved out - i.e if the value of the place in 2005 was £180k and in 10 years time it worth £200k you would pay 40% on 20k ?? Also, how do you prove the value when you started renting it out. All i have is a written valuation from our agent.
Many Thanks.

Hi Soho Blue (With soho, it can't be anything but blue),

Your query is two-fold, investment and Capital Gains Tax (CGT).

(1) Investment: This is a regulated area and only regulated financial advisors could answer this meaningfully for you. Without even attempting to give you any advise, you need to be aware of at least one thing, ie, tax relief. If you invest in residential property, there is no tax relief on your initial investment capital, ie the cost of the property. But then, when you sell, there is no tax on the initial capital which you unlock from the property. Even the increase in value will not all be taxed due to availability of various reliefs and allowances.

On the other hand, if you invest in conventional insurance based products, your initial investment could be set off as a deduction against your other taxable income. Effectively, you get a tax relief on your initial investment at basic and/or higher rate tax depending on your overall tax position. To a 40% taxpayer, £40,000 investment in a typical pension product would cost £24,000 after 40% tax relief. However, when you draw a pension from this in due course, the pension will be taxed as income. There are also restrictions in how and when you could use the money in a pension fund.

You need to take independent advise to decide which investment is better for you in a balanced portfolio. You are not alone in thinking of a property investment as their pension. In principle, there is nothing wrong in this thinking.

(2) Capital Gains Tax: Your understanding is not correct. Gain is calculated from beginning to end as a whole. The total gain is then apportioned between exempt and chargeable on a time-apportionment basis. The exempt period is the period of occupation as only or main residence plus the final 3 years of ownership, plus any other qualifying periods of absences such as absence abroad for employment. All other periods are chargeable.

However, the amount of the gain apportioned to chargeable periods is then further reduced for taper relief, lettings relief and annual exemption before arriving at the amount of taxable gain. This is added to your other taxable income and gains in the year of disposal to determine the rate at which it is taxed according to the taxable bands it falls into.

Due to the various reliefs and allowances, the final amount of taxable gain is only a fraction of the total gain. There is no need to rush to sell because you will always retain your exempt periods. However, the longer you keep on letting, the percentage of chargeable period gets bigger and the percentage of exempt period gets smaller. But then hopefully your total gains will be larger the longer you keep the property. May be you should calculate the tax position say every 2 years and keep this under review to decide if the tax position is becoming an issue.

Personally, if you are able to find the tenants and don't have any other problems such as void periods and tenants from hell, I would be inclined to carry on as you are indicating, at least for the next few years. You vacated in March 2005, therefore all periods of ownership upto March 2008 is exempt. Any gains for periods after this will be further reduced by taper relief (40% maximum after 10 years of ownership), lettings relief (upto £40,000 per owner) and annual allowance. Therefore, you have a long way before any of your gains from the flat is taxable.

There is also nothing stopping you from re-mortgaging the flat and extract some of the equity and invest in another property or any other investment products.

I hope this has been helpful.

Ramnik

[soho_blue]

Ramnik, that was very helpful indeed.
I think i'll try to hang onto the place for as long as possible and hopefully pay into a normal pension aswell (when i've got some spare cash).I was just concerned that in say 20 years i would end up losing half of the flats value in tax but that appears not the case. I'll have to employ an accountant and go through all the figures accurately. The flat is in an improving area of london and so far has been snapped up by tenants on the first day of viewings.
Once again, many thanks for your help.

[Tax Accountant]

Ramnik, that was very helpful indeed.
I think i'll try to hang onto the place for as long as possible and hopefully pay into a normal pension aswell (when i've got some spare cash).I was just concerned that in say 20 years i would end up losing half of the flats value in tax but that appears not the case. I'll have to employ an accountant and go through all the figures accurately. The flat is in an improving area of london and so far has been snapped up by tenants on the first day of viewings.
Once again, many thanks for your help.

You are welcome.
I think that so long the property is let, one should hang in there and let the tenant carry on paying your mortgage.

Ramnik