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.
Another factor to consider when selling your property is whether to sell with tenants in situ, as this may be more appealing to property investors. Read our blog on selling a rental property with tenants for more information.
In this article, we look at possible ways to reduce a hefty final CGT bill or avoid capital gain tax altogether.
What is capital gains tax?
CGT is a tax on the profit you make by selling certain assets. The CGT on property sales is higher than on the profits you may make on selling other assets. CGT only applies when you sell a property that is not your primary residence, and the rates vary depending on your tax band.
When do I have to pay capital gains tax on buy-to-let?
Since 27 October 2021, the deadline for paying capital gains tax has been 60 days. This means that if you sell a buy-to-let property, you must ensure that the capital gains tax is calculated and the CGT bill payment is made to HMRC within 60 days of completion.
Payments for capital gains tax are made through the Government Gateway, and failure to make the payment on time could result in a penalty fee and interest.
How do I calculate my capital gains tax bill?
To determine 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, stamp duty, and 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 the losses you made when selling other rental homes. For example, making a £50,000 loss when selling one property will increase the tax-free gain you can make when selling another.
Everyone has an annual CGT personal allowance. For the tax year 2022/23, this is £12,300 (the same as 2021/22). The CGT allowance for tax year 2023/24 is £6,000. Only gains above this amount are taxed.
Deduct your annual GCT allowance from your gains; you must pay Capital Gains Tax on this amount.
Add this amount to your total taxable income to determine whether you pay the lower or higher rate of CGT.
If you are in the basic rate tax band, you will pay 18% CGT on any profits from your sale. If you are in the higher tax rate band, you will pay 28%.
You can use an online capital gains tax calculator to work out how much CGT you are liable for.
How can I reduce my capital gains tax bill on buy-to-let property?
You can do several things to cut the amount of CGT you will pay on selling your buy-to-let property, but you should always take professional advice first.
1. Make the most of your tax-free allowance
In the tax year 2022-23, each individual's tax-free allowance was £12,300. For tax year 2023-24, the tax-free allowance is £6,000. You should ensure you use your annual exemption, as it cannot be carried forward into future tax years.
If you have already used all or part of your GCT allowance for the year, consider delaying the sale until the next tax year so you can make use of your full allowance.
2. Consider joint ownership with a spouse
If you and your spouse jointly own the property, you can combine your tax-free allowances - giving a total allowance of £24,600 for married couples and civil partners for the tax year 2022/23. The combined tax allowance for the tax year 2023/24 is £12,000. If your spouse is in a lower tax band than you, this could also help cut the final bill.
If you are the sole owner of the property, you could consider transferring all or part of the property to your spouse, allowing you to reduce your CGT liability when you come to sell.
3. Deduct your costs
There are three types of costs you can deduct from your capital gain. These are:
- The incidental costs you incurred when buying and selling the property, including solicitors fees, estate agent and surveyors fees. You are not permitted to include mortgage interest payments.
- Stamp Duty Land Tax when buying the property
- The cost of improvement works which enhanced the value of your asset, routine maintenance costs do not count
4. Set up a limited company
CGT only applies to sales of residential properties owned by individuals. Increasingly, buy-to-let landlords are setting up limited companies to manage their portfolios and reduce tax liability. Profits made selling properties through a limited company are subject to corporation tax, which is 19% for the 2022/23 tax year and 25% for the 2023/24 tax year (less than the 28% higher rate CGT).
5. Offset losses
If you dispose of an asset at a loss, this can be offset against your CGT liability. For example, poor-performing shares and stocks can be sold, and the loss you make can be offset against your CGT.
6. Reduce taxable income
One way to reduce your taxable income is to contribute towards your pension, which can provide tax relief. Another way to reduce your taxable income is to make charitable donations.
7. Check whether you're entitled to private residence relief or letting relief
Private residence relief
If you have lived in your buy-to-let property for a period, you may be entitled to some Private Residence Relief (PRR). You can claim tax relief for the years that the property was your principal residence and the last nine months before the sale.
For example, if you bought a property in January 2012 for £350,000 and sold it in January 2022 for £500,000, you would make a capital gain of £150,000. However, if you lived in the property as your main residence for the first five years and rented the property out for the final five, you are entitled to tax relief for 69 months (60 months you were living there plus nine months before the sale). In this example, you would only have to pay CGT on £63,750 of the gain.
Calculated as: 150,000 – (150,000/120 x 69)
If you only let out part of your home, you will need to work out what proportion you lived in; you only get private residence relief on this proportion.
If you lived in your property with your tenant, you might qualify for lettings relief up to £40,000.
Continuing the example above, if you had also lived in the property for the final five years when you had a tenant, you could claim lettings relief for this period. You would need to decide what proportion of your home you rented out, say you decide that your tenant's room accounted for 20% of the property. You made a chargeable gain of £75,000 in the second 5 years, but you can only claim private residence relief on £60,000 (80% of the total gain). However, you are entitled to letting relief on the remaining £15,000 related to the room you let out.
Is CGT changing?
The CGT allowances are changing significantly for the 2023/24 tax year, dropping from £12,300 to £6,000. The tax-free allowance for 2024/25 will reduce further to £3,000.
CGT is a complex business, and the rules and allowances change frequently. If you want to sell, we strongly recommend you seek advice from a financial advisor before trying schemes to reduce or defer CGT.
If you have decided to sell your buy-to-let property, get in touch with our experienced sales team today. We can ensure you achieve the best possible sale price.