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 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%.
When do I have to pay capital gains tax on buy-to-let?
For property sold between 6th April 2019 and 5th April 2020, you'll have until the next self-assessment tax deadline on 31 January 2021 pay the tax owed.
For property sold from 6th April 2020 the rules have changed. The correct tax needs to be calculated, notified and paid to HMRC within 30 days of completion.
How do I calculate my capital gains tax bill?
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. 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 tax year 2020/21 this is £12,300. 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.
For tax year 2020 to 2021 the basic rate tax is payable on total taxable incomes of less than £37,500.
How can I reduce my capital gains 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. Make the most of your tax-free allowance
In the tax year 2020-21, each individual’s tax-free allowance is £12,300. This means you can reduce your CGT liability by deducting £12,300 from any profit you make on the sale of your property. 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 the property is jointly owned by you and your spouse, you can combine your personal 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, this will to reduce your CGT liability when you come to sell.
3. Deduct your costs
You can deduct certain costs involved with buying and selling property from your gain when working out your CGT bill. This includes:
- Solicitors and estate agents' fees when buying and selling the property
- Stamp duty when buying the property
- Costs of improving the property, such as paying for an extension
However, you are not allowed to deduct costs associated with the maintenance of your home or interest paid on your mortgage.
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
You don’t have to pay capital gains tax on your primary residence, private residence relief rules cover this exception. If you are a landlord, private residence relief will also apply if at some stage you have you have lived in the property as your main home. If you are selling a property you have lived in, you’ll get tax relief for the years that the property was your main residence, as well as for the last nine months prior to the sale.
For example, if you bought a property in October 2010 for £350,000 and sold it in October 2020 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 then 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 may 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. This means you would pay no tax.
6. Change your nominated main residence
If you have more than one property you can nominate which will be tax free. If you can, nominate the property you expect will make the largest gain when you come to sell it. The property must genuinely be your main home, and you’ll need to be able to prove it with bills, bank statements and your name on the electoral register for that address.
You have two years from your combination of homes changing to amend your main residence.
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.