As a buy-to-let landlord you’ll be liable for capital gains tax (CGT) when you come to sell, if the rental property has increased in value during your period of ownership. If you’re thinking of selling up, you need to understand CGT and how much your final bill is likely to be. Read on for our buy-to-let landlords’ guide to CGT and some possible ways of reducing a hefty final tax bill.
Selling your buy-to-let
Recent government changes to the buy-to-let landscape, including the phased reduction in mortgage tax relief for landlords, mean that renting out property long-term may feel less appealing than it once did.
While London property prices have fallen, political uncertainty means that where they will be in a year’s time is a difficult call. Likely changes to private residence relief and letting relief on CGT, due to come into force in April 2020, may also be a reason to sell now, if you have previously lived in the property as your main home.
If you are thinking of selling up for financial reasons, it’s worth being clear about the amount of CGT you will pay before you make a final decision. You may find that holding on to your property for the time being is still a better investment.
What is CGT?
CGT is a tax on the profit you make by selling certain assets. The CGT on property sales is higher than profits you may make on the sale of other assets. CGT only applies when you sell a property that is not your main residence and the rates vary depending on which tax band you are in.
If you are in the basic tax band, you will pay 18% CGT on any profits from your sale. If you are in the higher tax band you will pay 28%. However, if the profit you make lifts your income above the basic threshold, some of your profit will be taxed at 28%.
How to work out CGT
To work out how much CGT you are liable for, deduct the purchase price from the sales price. You can also deduct legitimate costs, such as legal fees and stamp duty, as well as the cost of any improvements to the property – but costs associated with general upkeep can’t be deducted.
If you have a portfolio of properties, you can also offset losses you make, when selling other rental homes, against the gains. For example, if you make a £50,000 loss when selling one property, that will increase the tax-free gain you can make when selling another.
Reducing your tax bill
There are several things you can do to legitimately cut the amount of CGT you will pay on your property sale, but you should always take professional advice first. However, here are six ideas you might consider.
1: Use your tax-free allowance
In the tax year 2019-20, each individual’s tax-free allowance is £12,000. This means you can reduce your CGT liability by deducting £12,000 from any profit you make on the sale of your property. You should make sure you use your annual exemption as this cannot be carried forward into future tax years.
2: Consider joint ownership with a spouse
If the property is jointly owned by you and your spouse, you can combine your personal allowances - giving a total allowance of £24,000. If your spouse is in a lower tax band than you, this could also help cut the final bill.
3: Invest in your pension
If you are making pension contributions worth up to £40,000 a year, this contribution attracts tax relief. By making a lump sum payment into your pension, you could reduce your CGT liability. But you will only save a maximum of £4,000 using this method.
4: Invest in a start-up
Another way to offset or delay paying CGT is to invest your gain in an Enterprise Investment Scheme (EIS). EIS schemes offer income tax credits, or the opportunity to postpone paying CGT, by buying shares in small, unlisted companies, often start-ups.
Be aware though, that EIS can be very risky, and are best suited to investors with experience and a diverse portfolio. Take advice before investing.
5: Check whether you’re entitled to private residence relief or letting relief
If you have lived in the property as your main home, you may be able to claim private residence relief on the CGT for that period and the final 18 months of ownership – this period will be reduced to nine months from April 2020.
If you are married or in a civil partnership you can only name one property between you as your main home. However, if you are co-habiting, you can both name different properties as your main home.
You may also be able to claim letting relief if you used to live in the property, which could reduce your bill. From April 2020 it is likely that lettings relief will be scaled back, so it is only available to people who were in shared occupancy with a tenant. Letting relief doesn't apply to buy-to-let investors who let out their properties and never live in them.
Read more about private residence relief and letting relief on the gov.uk
website. It is advisable to take professional advice about these reliefs before making a claim.
6: Is it worth waiting?
If your overall taxable income is likely to reduce in the near future – if you’re approaching retirement or thinking of working part-time, for example - it may be worth waiting a little while to sell, so that more of your gain falls into a lower tax bracket.
CGT is a complex business, and the rules and allowances change frequently. If you are looking to sell, we strongly recommend you seek advice from a financial advisor before trying any schemes to reduce or defer CGT.
If you need advice on CGT, or any other aspects of buy-to-let, contact us for a chat. We will also be able to help if you decide if now is the right time to sell. To find out more get in touch today.