House Doctor: 'I'm selling a flat that I have been renting out. Do I owe any tax?'

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The Independent Online

Question: My fiancé and I have lived together for more than two years and plan to marry next year. Having moved into his house, I plan to sell my old flat which I've let out for nearly two years. I've had a decent £240,000 offer but am wary about paying a lot of capital gains tax. Can I avoid this?

Jayne Tenyer, Leeds

Answer: Stop worrying about your tax bill immediately – there's not a bean to pay. Capital gains tax (CGT) is payable on any "gain" when you sell or give away any significant financial asset such as a group of shares or a buy-to-let property that has risen in value. How much you pay depends on the size of the gain, your personal allowance – you can make £10,600 of gain or profit free of tax in the 2011-2012 financial year – and its rate, currently at 18 per cent for basic-rate taxpayers (28 per cent for higher). However,a tax break introduced under Margaret Thatcher's premiership will exempt you from any CGT payments.

During the early 1980s the then Conservative Employment Secretary Norman Tebbit urged jobless workers to up sticks and leave regions bereft of employment opportunities and head for those parts offering work – the so-called "on your bike" clarion call.

However, this threw up a problem: the sluggish housing market meant many seeking jobs elsewhere in the country couldn't easily sell their existing home and often had to let their property out for a year or so.

Aware of the injustice of taxing those who had followed the the Government's advice by moving to a new area for work and buying a new house while becoming – crucially – a reluctant temporary landlord with their original home, a "three-year" rule was introduced.

To avoid depriving the workers of their tax-free capital gains status, legislation created the "time to sell" rules giving a three-year CGT exemption.

"It means that if someone else rents your own main property, for tax purposes, the last three years of any period of ownership are treated as though you were still living there, and thus still qualify for tax-free status," says Patrick Stevens, tax partner at Ernst & Young accountant.

"But while there won't be any CGT to pay, make sure you've paid income tax on all the rental monies you've been paid since letting it out."