Selling your buy to let? You need to understand capital gains tax on buy to let property. This article covers when you owe it, how to calculate it and how to reduce your tax bill.
Summary
- CGT is key for landlords as it applies to profits made from selling buy to let properties that have increased in value since purchase.
- Landlords can reduce CGT by using allowances, claiming reliefs and deducting allowable costs from property transactions.
- Report and pay capital gains tax on time to avoid penalties.
Capital Gains Tax on Buy to Let Properties
Capital gains tax (CGT) is a tax on the profit made from selling a property for more than its purchase price. For landlords this is a big deal so understanding it is key. CGT includes rates, allowances and relief options that landlords need to consider to manage their capital gains tax liability.
CGT applies to the profit made from selling a buy to let property that has increased in value since purchase. This “disposal” of property can include selling, giving away or exchanging part or all of the property. So CGT applies when a rental property is sold for more than its purchase price.
When Do Landlords Pay Capital Gains Tax?
Landlords pay capital gains tax when they sell a property that has increased in value since purchase. If the sale price of a rental property is less than its purchase price then no CGT is due. If the gain on the property is less than the annual allowance then no CGT is owed. Knowing these conditions helps landlords plan their sales to reduce tax.
Reporting deadlines must be met too. The capital gains tax deadline is 30 days after the property sale has completed. Reporting on time avoids penalties and ensures tax compliance.
How to Calculate Capital Gains Tax on Buy to Let Property
Calculating CGT involves working out the gain which is the difference between the sale price and purchase price of the property. For example if you bought a property for £300,000 and sold it for £375,000 the gain would be £75,000. This includes sales below market value due to buyer’s financial aid.
Allowable costs can reduce the taxable gain. These costs include property improvements, legal fees and acquisition costs. CGT calculations require detailed records of purchase and sale prices, ownership dates and relevant costs or improvements.
Your income tax band determines the CGT rate. Basic rate taxpayers pay 18% or 28% and higher rate taxpayers pay 28%. If a basic rate taxpayer’s income exceeds the threshold they may pay CGT at a combination of rates.
Capital Gains Tax Rates for Buy to Let Properties 2024-2025
For the 2024-2025 tax year the CGT rate for basic rate taxpayers on property gains up to £50,270 is 18%. For higher rate taxpayers the CGT rate on selling a buy to let property is 24%. Gains above £50,271 are taxed at 28% for higher rate taxpayers according to UK capital gains tax rules.
These rates highlight the need to know your tax band as it affects your CGT liability. The higher rates for higher rate tax band and additional rate taxpayers means you need to plan your CGT.
Capital Gains Tax Allowances
Landlords have an annual exempt amount that reduces their taxable gains. For the 2023-2024 tax year this is £6,000. Using this CGT tax free allowance can reduce your CGT liability.
The annual exempt amount is non transferable to future years so must be used in the relevant tax year. Using this allowance can save you a lot of tax.
CGT Reliefs
There are several reliefs available to landlords to reduce CGT. One of the most useful is Private Residence Relief (PRR) which allows owners to not pay CGT when selling their main home. PRR can be claimed for the period the property was the main residence plus 9 months.
Letting Relief is another useful tax relief for landlords who have lived in the property with tenants. This relief allows landlords to reduce the CGT bill for properties rented out while they were living there.
Rollover Relief is available for furnished holiday lettings and defers CGT when reinvesting sale proceeds.
Allowable Costs and Expenses
Costs related to buying, selling or improving the property can be deducted from the gain to reduce CGT. Deductible expenses when selling a property include renovation costs, legal fees and acquisition costs. For example stamp duty paid at the time of purchase can be deducted from capital gains when the property is sold.
Many property improvements can be added to the cost base when calculating gains. These include fitting a new kitchen, extending the property and energy efficiency improvements. Other deductible costs include estate agent fees and solicitor fees which can be deducted from the capital gain.
Also expenses related to advertising the property for sale are allowable against capital gains. Accurate recording of these costs can save you a lot of tax.
Joint Ownership and CGT
CGT is affected by joint ownership of property. Only the gain in the owner’s share should be considered. Switching from joint tenants to tenants in common can give tax flexibility for property income and gains.
For CGT purposes joint tenants share gains equally, tenants in common are taxed on their actual share. Married couples or civil partners have income from jointly owned property taxed equally regardless of actual shares. Couples can combine tax free allowances through joint ownership effectively doubling the exemption.
Couples owning property as tenants in common can elect for income to be allocated to reflect actual shares using a Form 17 election. This can be beneficial depending on individual circumstances.
Non-Resident Landlords
Non-resident landlords must pay CGT on UK land or property. This tax was introduced for non-UK resident landlords selling UK property on April 6 2015. As of April 6 2019 CGT was extended to all direct and indirect disposals of land and property in the UK by non-resident landlords.
Non-UK residents must report all sales of UK property from April 6 2020 even if no tax is due. For properties sold in the UK before this date non-residents must file a specific non-resident Capital Gains Tax return. Filing early avoids penalties and ensures compliance with tax rules.
How to Reduce CGT
Selling a property through a limited company can reduce tax exposure as profits are taxed at corporation tax rates rather than CGT. Changing the main residence can also reduce CGT on buy to let properties subject to certain conditions.
Get a tax professional involved early in the sale process to structure the sale to reduce tax. Minimising CGT is key to getting the most out of a property sale for landlords.
Reporting and Paying Your CGT Bill
CGT must be reported and paid within 60 days of the property sale. This applies to residents and non-residents. A property tax accountant will keep you up to date with the latest tax changes and rules for buy to let properties.
Get professional advice on capital gains tax and avoid HMRC penalties. Accurate reporting and paying your CGT bill on time keeps you compliant and out of trouble.
Get Professional Help
A professional can show you how to legally reduce your CGT bill. A CGT accountant can save you a lot of tax by maximising exemptions and reliefs.
Don’t try to reduce CGT without professional advice.
Conclusion
CGT on buy to let properties requires planning and strategy. By knowing the CGT rates, allowances, reliefs and deductible costs landlords can reduce their tax bill. Get professional advice to stay compliant and get more profit. Proactive tax management is key to property success.
FAQs
When do landlords have to pay CGT?
Landlords must pay CGT when they sell a property that has increased in value since they acquired it. This tax is on the profit made from the sale, not the increase in property value.
How is CGT calculated on a buy to let property?
CGT on a buy to let property is calculated by taking the sale price, subtracting the purchase price and then deducting any allowable costs and expenses from the transaction. This means you only pay tax on the actual gain made from the sale.
What are the current CGT rates for buy to let properties?
The current CGT rates for buy to let properties are 18% for basic rate taxpayers on profits up to £50,270, 24% for higher rate taxpayers and 28% for profits over £50,271. You need to know these rates when considering property investments.
Does joint ownership affect CGT?
Joint ownership can affect CGT calculations as joint tenants share the gain equally, while tenants in common are taxed on their individual shares. You need to know your ownership type to know what tax you might be liable for.
What to claim to reduce CGT?
Private Residence Relief, Letting Relief, Rollover Relief. That’s it.
