If you are thinking of selling your buy-to-let property, you need to understand capital gains tax (CGT) and how much your final bill is likely to be.
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.
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 the sale of 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?
The rules have recently changed regarding reporting and paying capital gains tax. For property sold from 27th October 2021, the correct tax needs to be calculated, notified and paid to HMRC within 60 days of completion.
Do not wait until the next tax year to report gains on UK residential property. You may have to pay interest and a penalty if you do.
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 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. 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.
Everyone has an annual CGT personal allowance. For the tax year 2021/22, this is £12,300 (the same as it was for 2020/21). 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 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%.
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 the sale of 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 2021-22, each individual's tax-free allowance is £12,300. You should make sure 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. 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 – solicitors fees, estate agent fees and surveyors fees. Mortgage interest payments cannot be included.
- Stamp Duty Land Tax when buying the property
- The cost of improvement works which enhanced the value of your asset, normal 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 their tax liability. Profits made selling properties through a limited company are covered by corporation tax, which is currently 19% (much less than the 28% higher rate CGT).
5. 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, as well as for 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 prior to 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 at the same time as 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.
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 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.