If you own a buy-to-let property and sell it for more than you paid, you make what is known as a ‘capital gain’, which may be taxable under Capital Gains Tax (CGT). In some instances, you may be able to reduce the amount of CGT you need to pay.
As Stephen Clark, from Finbri development finance, says, “Capital Gains Tax can be a challenging subject for buy-to-let property investors as, without the right advice, these taxes can eat into their profits. However, several tax breaks, deductions, and exemptions are available to be utilised. With the right advice, BTL investors could save thousands in their next CGT bill.”
We take a look at what Capital Gains Tax is, what types of tax relief are available for BTL investors, and ways you might be able to reduce the amount of CGT you would need to pay.
Capital Gains Tax is a tax on the profits you have made on the sale or disposal (e.g. swap or give away) of an asset – in this case, a BTL investment. When you sell an asset, it’s only the profit that is subject to CGT tax, not the total sum of the sale.
For example, if you bought a property for £250,000 and later sold it for £300,000, you would make a £50,000 profit. The £50,000 would be subject to CGT, not the total sale amount.
Some assets, including a primary residence, are tax-free. However, if the value of your buy-to-let property has increased since you purchased it, you may be required to pay CGT on all or even a proportion of profits derived from the capital growth when you come to sell the property.
The current rate (August, 2022) of CGT you will need to pay after selling your BTL property is determined by your taxable income. If you have an income of £50,000 or less, you can expect a basic rate of 18%. If you are in the higher-rate tax bracket, earning above £50,000, you would expect a 28% tax rate. The difference in rates can significantly impact the amount of CGT you can expect to pay.
For example, if you purchased a rental property for £140,000 five years ago and sold it today for £160,000, your capital gain would be £20,000. If you deduct your CGT allowance, which currently stands at £12,300 in 2022-23, your CGT liability would be £7,700.
As long as there are no other tax breaks to deduct, the total CGT would be £1,386 for basic rate taxpayers (below £50,000) and £2,156 for higher-rate taxpayers (above £50,000).
As an investment, the primary purpose of your buy-to-let is to make a profit. You can either make a steady monthly income from rental or as a capital gain from the increase in property value.
In the autumn budget in 2021, the then Chancellor Rishi Sunak announced that the deadline to report and pay CGT from the sale of a property was increasing to 60 days, up from 30 days, as the OTS said the 30-day deadline was challenging to meet.
So with the new deadline, once the sale of your property is complete, you will need to inform the HMRC and make your CGT payment within 60 days. Failure to make payment and register the transaction on time may incur penalty fees and interest charges.
You can make your payments via the Government Gateway and must provide details of any capital gains in your self-assessment if you are self-employed.
Landlords may possibly use several tax breaks to help reduce the overall cost of capital gains, so if you own a rental property and decide to sell, check your eligibility for tax relief.
Private Residence Relief
Private Residence Relief (PRR) allows homeowners to sell their properties while avoiding liability for CGT on profits. You don’t usually pay CGT on the sale of a primary residence, as private residence relief will apply in this instance. However, if the BTL property you are selling used to be a primary residence in the past, PRR will also apply.
For example, if you bought a property 20 years ago and it was your primary residence for five years before it became a buy-to-let, it would be unfair to pay CGT on the entire length of ownership when it was, in fact, your own home for five years. So in this instance, you could claim a tax break for the five years you held the property as your main home.
Letting relief was a tax break provided to select landlords that is no longer available. As of April 2020, you can only claim this relief if you lived in the home with your tenants, which means you’d already be entitled to private residence relief.
Several deductions are available for use against Capital Gains Tax, including;
CGT Personal Allowance
Just like an annual income allowance, capital gains are also subject to an annual allowance. As of 2022/23, the yearly CGT allowance stands at £12,300, which means you can deduct this from any profits from your property’s sale.
Certain expenses can be deducted from capital gains, including;
- Fees for estate agents and solicitors
- Stamp duty
- Costs of surveying and valuing
- Costs associated with improvement work, such as an extension
As capital gains are only applicable to the sales of residential properties, more BTL landlords are deciding to form limited companies to reduce their tax liabilities. The profit generated from selling properties through a limited company is taxed at 19%, which is a massive reduction for investors in the higher-rate CGT band at 28%.
So for serial investors with multiple properties, setting up a limited company to manage their portfolio may provide some welcome tax relief.
If you expect a BTL property to be vacant for a certain time, you can shift the BTL property into your primary residence to reduce CGT. You can do this as often as necessary as there is no limit on the number of times you can shift your primary residence. However, you must do so within two years of your combination of homes changing.
The details of your primary residence must be demonstrated in bills, bank statements, and via the electoral roll. Any inconsistencies, including having a different address on a self-assessment, can be seen as tax evasion and should be carefully executed. A qualified accountant will be able to help avoid any discrepancies.