I purchased flat in 2006 (from inherited money) in London for £310,000 and lived here for over a year. I then decided to rent it out from 2008 and moved back into a family rented flat. My mother (a protected private tenant living a couple of miles away) did not want to move away from her home of 60 years to stay with me, but was becoming increasingly unable to take care of herself. By 2012, I was her full-time unpaid carer and although I was selfemployed (as a designer maker) I was not able to actually do any work. Income tax was paid on the rental of the flat, plus some sales of old stock. My mother passed away in 2015 and I managed to move back in to my flat in March 2016. However, I now find myself, at 65, assetrich/cash poor with thoughts of downsizing to release some equity on which to live. My flat is now worth approximately £650,000. According to HMRC, due to the past rental my liability for capital gains tax (CGT) (unless I go into some kind of care home) would be approximately £35,000. Is this right? If so, would a drawdown mortgage be more tax-efficient?

Arthur Weller replies:
If you sold your flat now you would make a capital gain of approximately £340,000. The first two years are exempt due to occupation, as are the last two and a half years. If you now make an election utilising Extra-Statutory Concession D21 www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64500 that the flat was always your main residence, you can claim three years’ period of absence as deemed occupation (see www.gov.uk/hmrcinternal-manuals/capital-gains-manual/cg65030 and subsequent pages). This would mean only 5.5 years of gain is chargeable. Deduct £40,000 for the letting exemption, and £11,700 for the CGT annual exemption would result in a gain of about £104,000. If you don't have much income this would mean a CGT bill of about £26,000. Whether alternatively to go for a mortgage is a commercial matter, not really a tax matter.