Is it better to sell or rent out my home in Paddington? Here, we look at the taxes payable when selling a rental property.
Many people who move away from Paddington for work or family reasons know that homes in Central London will continue to rise in value over the long term.
Those who can afford to keep hold of property they own in Paddington, or other parts of Central London that Plaza Estates has an in-depth knowledge of, are advised to generate a regular income by renting out their former primary residence.
However, they should be aware that if the owner of a rental home in Paddington purchases another property in the UK they will be forced to pay an additional 3% stamp duty land tax.
It is also worth noting that if they decide to cash in on the rise in value of their Paddington property at a date in the future, it is highly likely that they will pay tax on the profit they make from the sale – if they own a second property that they use as a primary residence.
To work out how much Capital Gains Tax you will currently have to pay when selling a rental property in Paddington, deduct the price paid for the flat or house from its market value at the time of its disposal. Please note that the HMRC will not reduce its CGT demand if the property is sold for less than its market value.
However, the taxman does allow vendors to deduct both buying and selling costs from the amount of property profit liable for CGT. This includes estate agent and legal fees plus any stamp duty that was paid.
You can also deduct the cost of improvement works from the amount of property profit liable for CGT. This includes extensions, but not maintenance costs such as decorating, on the condition that those improvements are reflected in the property at the date of disposal.
When it comes to property sales, CGT is charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. This is payable on any profit earned on the property minus your £11,100 CGT Allowance and other reliefs available.
Tax specialists point out that CGT is currently charged at 18% on the amount a seller has available in the basic rate band (£11,000 to £43,000).
Given the size of property value increases in Paddington and other areas of central London, the basic rate band is often used up and the majority of the gain ends up taxed at 28% even if the taxpayer is a basic rate payer for income tax. Therefore, the rate you will pay depends on the size of the gain and not just whether or not you are a basic rate taxpayer.
The better news is a number of reliefs are available if the owner has lived in the rental property. Private Residence Relief is available for the time you lived in the property. This period of time is tax-free.
Letting Relief is also available if you were subject to tax on your rental income. Lettings Relief can reduce taxable gains by up to a maximum of £40,000 per owner. If the rental property has two owners, up to £80,000 Letting Relief is available. But beware that the HMRC forbids landlords selling a rental property in Paddington to claim more Letting Relief than Private Residence Relief.
Final Period Exemption, meanwhile, stipulates that the final 18 months of your period of ownership always qualify for CGT relief, regardless of how you use the property in that time – as long as it has been your only or main residence at some point.
It can be difficult calculating how much CGT is payable after disposing of a rental property in Paddington, and Plaza Estates would strongly advise landlords to seek professional advice.
It should also be noted that clauses inserted into the Finance Bill that is currently going through parliament may result in profits from the sale of a rental home in Paddington becoming liable for income tax rather than CGT.
Renting out a property in Paddington remains a wise move. It should come as no surprise that demand for rental homes in Paddington continues to outstrip their supply and Plaza Estates has a long list of tenants looking for good quality rental property in Central London.
If you would like more information on selling or renting your Paddington property or any other residential property in the Central London areas that we cover, please contact Plaza Estates