As you have lived in the home you plan to sell as your main residence, it will be regarded as exempt from CGT for those years. HMRC also allows the last 18 months to be exempt for any property that has been your main residence.
For example, if you owned the property for, say, 12 years and you lived in it for two years and six months, then a total of four years - two and a half years plus the last 18 months – would be exempt from CGT. Therefore, you would only pay for four years of CGT for the 12 years you owned the property.
HMRC also allows a further relief from CGT called lettings relief.This allows up to £40,000 of any capital gain on a property that has been your main residence and subsequently let out to be exempt from CGT.
The relief, however, cannot exceed the gain exempt under the main residence rules. So if £35,000 of the gain is exempt as your main residence, then £35,000 can be exempt as lettings relief.
However, if say £100,000 is exempt, then only £40,000 would be exempt under the lettings relief rules.
The capital gain on the sale of the property will be calculated by subtracting the cost of the property and any improvement made from the proceeds.The cost will be the probate value at the time that you inherited the property.
That gain is then further reduced by the main residence relief and the lettings relief.
The eventual gain is then taxed at a rate of 18% or 28% or a mixture of the two, depending on your income.
The gain is also subject to your annual CGT allowance, which for 2015/16 is £11,100. Be sure that you claim all the costs related to buying and selling the property such as legal and surveyor fees, stamp duty and estate agency fees.
Moving back into the home will probably not reduce the CGT for two main reasons. First, the last 18 months of ownership will be deemed to be your main residence in any case so you would need to move back for significantly longer than that to significantly reduce the tax due.
Second, HMRC looks at the intention of the individual when they move into a property when deciding whether main residence relief is available.
As the intention is to live there temporarily with a view to reducing your tax bill, it is likely that such a plan will fall foul of the anti-avoidance legislation.
There are no tax implications to paying back your mortgages.Your buy-to-let lender will insist that when you sell the property the proceeds are used to pay off the mortgage.
As this is a somewhat complicated matter, it would be wise to speak to an independent financial adviser.
Geraint Jones is head of private client services at Berg Kaprow Lewis LLP