If you sell a buy-to-let property for more than you bought it, you make a ‘capital gain’ – and this may be subject to capital gains tax (CGT). However, in some circumstances you may be able to reduce the amount of CGT you have to pay.
Let’s look at how you might be affected, what forms of BTL tax relief are available, and what steps you can take to minimise your exposure to CGT.
What is capital gains tax?
Capital gains tax (CGT) is paid on the profit you make when you sell or dispose of (e.g. give away or swap) an asset that has increased in value. Some assets are tax-free, including your main home. But 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 sold a buy-to-let property between 6 April 2020 and October 27 2021 and are required to pay CGT, you have 30 days from the completion date to notify HMRC and make a payment. For sales completed after this point you must make the payment within 60 days. 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 are made online through the Government Gateway. You’ll need a user ID and password to access the system, but if you don’t already have these you can create an account when you report 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 £50,000 or less, the rate is 18%. Higher rate taxpayers with an income of £50,001 or more pay 28%.
For example, if you bought a rental property ten years ago for £100,000 and sold it today for £150,000, your capital gain would be £50,000. Of this, £37,700 would be taxable (once your CGT allowance is deducted – see below). Assuming no other tax reliefs, your CGT bill on this transaction would be £6,786 (if you’re a basic-rate taxpayer) or £10,556 (if you’re a higher-rate taxpayer). The good news is that capital gains are tax separately from other income, so your income tax bracket for your other income will remain the same as it was.
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. This is covered by Private Residence Relief (PRR) rules (formerly known as Principal Private Residence Relief). If you are a landlord, PRR will also apply if the property you’re selling was at some stage your only or 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.
For example, if you bought a property in January 2010 for £100,000 and sold it in January 2020 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 you let it out. Under PRR rules you’d be entitled to relief covering 69 months out of the 120 months you owned the property – the first 60 months you lived there plus the final nine months prior to the sale. In this example, that relief would equal £28,750 – which is calculated as (£50,000/120 months) x 69 months. So you’d be taxed only on £21,250 of the capital gain.
Do I qualify for letting relief?
Historically, letting relief allowed buy-to-let owners to reduce the amount of CGT they owed following the sale of a rented property by up to £40,000, just as long as it had been their main residence at some point. However, the rules changed in April 2020 and effectively removed this relief for buy-to-let landlords. 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 would typically already qualify for relief under PRR rules.
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. This CGT allowance is called the annual exempt amount and it currently stands at £12,300. For example, if you made a single capital gain of £20,000 in a year from selling a rental property, a maximum £7,700 of that gain would be taxable, as the rest would fall within your personal allowance.
Specific costs can also be deducted from any gain. These include:
- Estate agents’ and solicitors’ fees
- Stamp duty paid when the property was purchased
- Surveying and valuation costs
- Costs linked to improvement work – e.g. an extension.
Using the capital gain example of £20,000 above, let’s say you’d spent £10,000 on a small extension. Once deducted, your total gain would be £10,000. You’d no longer be liable to pay any CGT at all, as the total gain would be covered by your personal allowance.
Are there any exceptions available on buy-to-let CGT?
There have been numerous recent changes to rules and regulations governing the buy-to-let market and buy-to-let 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 minimise their tax exposure. Profits made selling properties through a limited company are covered by corporation tax, currently set at 19%, which is far more attractive to investors when compared to higher rate CGT at 28%.
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 situation Tina could face a CGT bill of up to £14,000. However, if she were to sell that same 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 buy-to-let property. If you’re expecting one of your buy-to-let properties to be unoccupied for a prolonged period, this is certainly 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 you must do so 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 your accountant before attempting 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, e.g. having a different address linked to your self-assessment tax account. It’s also 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 stiff 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 that you can potentially reduce your bill while staying within the law. This article is not an exhaustive guide, so you should not attempt any of the measures suggested here unless your professional adviser recommends them.