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Can I avoid capital gains tax on my buy-to-let property?

If you sell a buy-to-let (BTL) property for more than you bought it, you may have to pay capital gains tax (CGT) on your rental buy-to-let property.

However, in some circumstances, you may be able to avoid or reduce the amount of CGT you have to pay on your UK property.

We’ll look at what BTL tax relief is available and what you can do to minimise your tax bill.

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What is capital gains tax?

Capital gains tax (CGT) is paid on the profit you make when you sell or dispose of an asset that has increased in value.

Some assets are tax-free, including your main home.

If the value of your rental property has increased since you bought it, you may have to pay CGT on some or all of the profit when you sell it.

When do I have to pay capital gains tax on buy-to-let?

As the owner of a rental property, you stand to profit in two ways: from the rental income paid by tenants and from capital growth if the property increases in value.

Although you don’t normally pay tax on the sale of your main residence, the rules around rental property sales are different.

If you complete a buy-to-let property sale on or after 27 October 2021 and need to pay CGT, you have 60 days from the completion date to notify HMRC and make a payment.

Failing to report the sale and pay your tax on time is likely to land you with a penalty fee and interest charges, so it’s important to keep on top of this (it can help to have an accountant).

Payments can be made online through the Government Gateway site. You’ll need a user ID and password. If you don’t have these, you can create an account when you report CGT and pay.

If you usually complete a self-assessment tax return, you’ll also need to provide details of any capital gains you’ve made at the end of the relevant tax year.

What is the capital gains tax rate on buy-to-let property?

The rate at which you pay CGT following the sale of a buy-to-let property depends on your taxable income.

If you’re a basic rate taxpayer with an income of £50,270 or less, the rate is 18%. Higher rate taxpayers with an income of £50,271 or more pay 28%. 

If you know what your gain on a property is, you can use this calculator to work out if you need to pay CGT.

What are the buy-to-let capital gains tax reliefs?

If you sell a property that you have let out at some stage, you may qualify for tax relief to reduce your CGT bill.

Does my rental property qualify for Private Residence Relief?

You don’t normally have to pay CGT on the sale of your main residence as it is covered by Private Residence Relief (PRR) rules, which was formerly Principal Private Residence Relief.

If you are a landlord, PRR will also apply if the property you’re selling was at some stage your main residence.

After all, it wouldn’t be fair if your house had been increasing in value for 20 years, was then let out for only a year, and then you had to pay CGT on the whole 21 year price increase.

So, 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 – even if you weren’t living there at this time.

For example, if you bought a property in January 2011 for £100,000 and sold it in January 2021 for £150,000, you’ve made a capital gain of £50,000.

However, for the first five years (60 months) it was your main residence, and for the final five years, you let it out.

Under PRR rules, you’d be entitled to relief for 69 months out of the 120 months you owned the property – the first 60 months you lived there plus the final nine months you owned the home.

In this example, that relief would equal £28,750, which is calculated as £50,000 divided by 120 months, multiplied by 69 months. So, you’d be taxed only on £21,250 of the capital gain.

Do I qualify for letting relief?

Letting relief used to allow BTL owners to reduce the amount of CGT they owed after selling a rented property if it was their main residence at some point, but the rules changed in April 2020.

To qualify now, you must have been living in the property at the same time as your tenant(s). Landlords to whom this still applies will typically already qualify for relief under PRR rules.

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Are there any deductions available on buy-to-let CGT?

You have an annual CGT personal allowance, just as you have an annual personal allowance on your income.

The CGT allowance is called the annual exempt amount and it currently stands at £6,000 but a married couple or civil partners who jointly own property can combine their allowances.

If you’re either married or in a civil partnership, and only one of you owns a property, you can transfer part or the whole property to your partner to reduce your CGT bill.

Specific costs can also be deducted from any gains.

These include:

Are there any exceptions available on buy-to-let CGT?

There have been many changes to rules and regulations governing the buy-to-let market over the last few years, including mortgages, many of which have hit landlords in the pocket.

As CGT only applies to sales of residential properties owned by individuals, more buy-to-let landlords are setting up limited companies to manage their portfolios and reduce tax exposure.

Profits made selling properties via a limited company are covered by corporation tax, currently set at 19% for a profit of £50,000 or less (a 25% rate applies to more than £250,000 profit), which is more attractive compared to the higher rate of CGT.

For example, Tina is a buy-to-let landlord who makes a £50,000 gain selling a property.

She’s a higher rate taxpayer, isn’t eligible for PRR and has already used her personal allowance. In this scenario, Tina faces a CGT bill of up to £14,000.

However, if she sold the property through a limited company, her corporation tax bill would be capped at a maximum of £9,500.

Can I change my elected residence to reduce buy-to-let CGT?

You may have considered changing your nominated main residence to try and avoid CGT on your buy-to-let property.

If one of your buy-to-let properties is unoccupied for a prolonged period, this is one way of reducing any potential CGT bill.

There is no limit to the number of times you can change your stated main residence, a process known as flipping, but any nomination must be done within two years of your combination of homes changing.

Nominating a new main residence is a widely used practice to reduce exposure to CGT, but you should consult with an accountant before doing this.

The property must genuinely be your main home, and you’ll need to be able to prove it. Bills, bank statements and evidence of your name being on the electoral register could all be required.

It’s also crucial to ensure there are no contradictions such as having a different address linked to your self-assessment tax account.

It’s important to remember that married couples and civil partners are only allowed to nominate one main residence between them. Failure to get this right could result in your actions being treated as tax evasion and incurring penalties.

So can I avoid capital gains tax on my buy-to-let property?

When you buy to let, it is often the case that you can end up paying more CGT than necessary.

A good accountant or financial adviser can help you identify ways to potentially legally reduce your bill.

This article is not an exhaustive guide, so you should not attempt any of the measures unless a professional adviser recommends them.

Unbiased can connect you with a local financial expert who can help you with your buy-to-let investment and reducing your capital gains tax.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.