How is the capital gains tax calculated in my circumstances?

My wife and I bought our house in 1998 for £18,000 from the council, which was half the market value of the property at that time. We lived there until 2005, and from 2005 we rented out the house and moved to a new house that we bought. Now, in 2014, we want sell our first house for £170,000, and would like to know how much capital gains tax I would be liable for.

Your capital gain is £170,000 - £18,000 = £152,000, or £76,000 each for you and your wife. You owned the house for 16 years, so your gain is £4,750 per year each. The first 7 years are exempt due to actual occupation, and the last 1.5 years are 'deemed' occupied, so you qualify for 8.5 years principal private residence (PPR) relief. 8.5 (years) * 4,750 (gain per year) = £40,750 PPR relief each. The remainder (£76,000 - £40,750) = £35,625 is taxable. However each one of you has a letting exemption of up to £40,000. See www.hmrc.gov.uk/manuals/cgmanual/CG64716.htm. This letting exemption reduces the remaining gain to nil.