If you sell a buy-to-let property for more than you paid for it, you make a ‘capital gain,' which may be taxed (CGT). However, in some cases, you may be able to lower the amount of CGT that you must pay.
Let's take a look at how you can be affected, what types of BTL tax relief are available, and what steps you can take to reduce your CGT exposure.
What exactly is capital gains tax?
Capital gains tax (CGT) is levied on profits made when you sell or dispose of (e.g., give away or swap) an item whose value has increased. Some assets, including your primary residence, are tax-free. However, if the value of your rental property has increased since you purchased it, you may be required to pay CGT on a portion or all of the profit when you sell it.
When do I have to pay capital gains tax on my buy-to-let investment?
As the owner of a rental property, you stand to profit in two ways: through rental revenue and capital gain if the property's value rises. Although you do not generally pay tax on the sale of your own dwelling, the laws for the sale of a rental property are different.
If you sold a buy-to-let property between April 6, 2020, and October 27, 2021, you have 30 days from the completion date to notify HMRC and make a payment. For sales performed after this date, payment must be made within 60 days. Failure to register the transaction and pay your tax on time will almost certainly result in a penalty fee and interest charges, so it's critical to stay on top of this (it can help to have an accountant).
Payments are made via the Government Gateway. To access the system, you'll need a user ID and password; if you don't already have them, you can establish one when you report and pay. If you generally file a self-assessment tax return, you'll also need to provide information about any capital gains you made at the conclusion of the tax year.
What is the capital gains tax rate on the buy-to-let property?
The rate at which you pay CGT after selling a buy-to-let property is determined by your taxable income. If you’re a basic rate taxpayer with an income of £50,000 or less, the rate is 18%. Higher-rate taxpayers earn £50,001 or more and pay 28%.
For example, if you paid £100,000 for a rental property ten years ago and sold it today for £150,000, your capital gain would be £50,000. £37,700 of this would be taxable (once your CGT allowance is deducted – see below). Assuming no other tax breaks, your CGT liability on this transaction would be £6,786 for basic-rate taxpayers or £10,556 for higher-rate taxpayers. The good news is that capital gains are taxed separately from other income, so your tax bracket for other income will remain the same.
What are the capital gains tax breaks for landlords?
If you sell a property that you have previously rented out, you may be eligible for tax relief to decrease your CGT liability.
Is my rental home eligible for Private Residence Relief?
Normally, you do not have to pay CGT on the sale of your primary residence. Private Residence Relief (PRR) laws apply in this case (formerly known as Principal Private Residence Relief). If you are a landlord, PRR will also apply if the property you are selling was your exclusive or primary residence at some point. After all, it wouldn't be fair if your house had been increasing in value for 20 years, then you rented it out for a year and had to pay CGT on the entire 21-year price gain. So you'll obtain tax breaks for the years the property was your primary residence, as well as the nine months before the sale.
For example, if you purchased a property in January 2010 for £100,000 and sold it in January 2020 for £150,000, you would have made a £50,000 capital gain. However, it was your primary residence for the first five years (60 months), and you rented it out for the last five. According to PRR rules, you'd be entitled to relief for 69 months of the 120 months you owned the house – the first 60 months you lived there plus the final nine months before the sale. In this case, the relief would be £28,750, computed as (£50,000/120 months) x 69 months. So you'd only be taxed on the first £21,250 of your capital gain.
Do I have a case for granting relief?
Historically, letting relief permitted buy-to-let owners to decrease the amount of CGT they owed after selling a rented property by up to £40,000, as long as it had been their primary residence at some stage. However, in April 2020, the laws changed, thereby eliminating this benefit for buy-to-let landlords. To be eligible currently, you must have lived in the property simultaneously as your tenant (s). Landlords who are still affected by this would normally be eligible for reimbursement under PRR guidelines.
Are there any buy-to-let CGT deductions available?
You have an annual CGT personal allowance, just like you have an annual income personal allowance. This CGT allowance is known as the yearly exempt amount, and it is presently worth £12,300. For example, if you made a single capital gain of £20,000 in a year by selling a rental property, only £7,700 of that gain would be taxable because the remainder would be covered by your personal allowance.
Specific expenses can be deducted from any gain. These are some examples:
- Fees for estate agents and solicitors
- When the property was purchased, stamp duty was paid.
- Costs of surveying and valuing
- Costs associated with improvement work, such as an extension.
Using the £20,000 capital gain scenario above, suppose you spent £10,000 on a tiny expansion. Your total gain after deductions would be £10,000. You would no longer be required to pay CGT because the complete gain would be covered by your personal allowance.
Are there any buy-to-let CGT exemptions available?
Many recent changes to the rules and regulations governing the buy-to-let market and buy-to-let mortgages have come at the expense of landlords. Because CGT only applies to individual sales of residential properties, more buy-to-let landlords are forming limited companies to manage their portfolios and reduce their tax liability. Profits produced from property sales through a limited company are taxed at a lower rate of 19%, which is significantly more appealing to investors than the higher rate of 28% CGT.
Tina, for example, is a buy-to-let landlord who generates a £50,000 profit when she sells a property. She is a higher-rate taxpayer who is not entitled for PRR and has exhausted her personal allowance. Tina might face a CGT cost of up to £14,000 in this circumstance. If she sold the same property through a limited company, her corporation tax obligation would be limited to a maximum of £9,500.
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