I bought my current flat in September 2012 for £300,000. I spent £35,000 doing it up. After two years, my partner came onto the mortgage. We have a joint mortgage of £260,000 and the flat is worth approximately £490,000. We have now outgrown the flat and want to consider buying a house nearby for £500,000 and switching the flat to buy-to-let. We would incur (from April) £35,000 stamp duty (second home stamp duty) and then the additional tax on rental income and capital gains tax. If the flat was worth £600,000 in two years’ time, would that outweigh the tax I'd need to pay or would any additional profit just be paid to the taxman? Ultimately - is it financially more sensible to sell it or hold on to it? 

Generally, there is a saying 'don't let the tax tail wag the commercial dog'. If you retain the flat you will pay an extra £15,000 stamp duty land tax (SDLT) now (3% of £500,000), but if you sell your main residence within three years you should be able to claim a refund. You will receive rental income, on which, as you have quite rightly pointed out, you will have to pay income tax. You expect to receive an extra £100,000 when you sell in two years from now, but again this will be subject to capital gains tax. You may also have to pay two years’ worth of interest to a lender on £500,000 (or some of that figure) if you do not have the cash to purchase your new house. I do not know more details of your scenario, so I cannot tell what will be your after tax proceeds of the rental income and extra £100,000 capital gain. I think that these are the main points you need to consider, and now you need to do the 'number crunching'. Also consider how likely it is that you will get £600,000 in two years from now.