The good news for landlords is house prices are rising – but that means paying more capital gains tax when selling.
The latest official house price data shows values have surged by around 7.5% in the past year with help from the stamp duty holiday.
The buoyant market is tempting for property investors to jump in and sell at a profit.
Capital Gains Tax (CGT) is charged on the difference between the property’s buying and selling price, but you can reduce the amount you pay in some circumstances.
CGT rules for landlords have changed in recent years, so this article explains how CGT impacts landlords and what they do to save on the tax bill.
- 1 What is buy-to-let capital gains tax?
- 2 How much CGT do landlords pay on buy-to-lets?
- 3 Capital gains tax reliefs for landlords
- 4 Moving in to a buy-to-let to save CGT
- 5 Giving away a buy-to-let and CGT
- 6 Buy-to-Let CGT template
- 7 More information
What is buy-to-let capital gains tax?
Capital gains tax is paid on the gain (profit) you make when disposing of buy to let property.
A disposal is the sale, giving away or exchanging all or part of the property.
Working out the tax due is more complicated if you have lived in the property as your main home at any time during ownership.
How much CGT do landlords pay on buy-to-lets?
How much CGT a landlord pays on a buy-to-let depends on how much income they earn in the tax year of the disposal.
The CGT rate is 18% for basic rate taxpayers with earnings of up to £50,000 in a tax year.
The rate rises to 28% for higher rate taxpayers who earn more than £50,000 in a tax year.
But that’s not all – like income tax, every taxpayer has a tax-free CGT allowance each year and special tax reliefs can reduce the bill as well.
The worst case scenario is no tax reliefs apply – which is unlikely.
Basing a selling price on the latest UK average house price of £268,000 for a property purchased for £125,000, the gain would be £143,000. For a basic rate taxpayer CGT would be £25,740, while a higher rate taxpayer would face a bill of £57,200.
Capital gains tax reliefs for landlords
Landlords have several ways to reduce their CGT bills:
CGT tax-free allowance
Everyone has an annual CGT tax-free allowance called the annual exempt amount. The allowance is set at £12,300 until April 2025.
Private Residence Relief (PRR)
This is the tax break that frees owners from paying CGT when they sell their main home. If you have lived in your buy-to-let at any time during ownership, you are entitled to make a PRR claim for the period.
PRR is aimed to remove any CGT for the years you lived in the property plus nine months, which is a CGT-free period to allow you to sell.
Taking our example above, you owned a home for 20 years and lived there for five years. During the time of ownership, the property gained £143,000 in value.
The tax-free gain under PRR is £82,225 (£143,000/120 x 69), leaving a taxable gain of £60,775 (£143,000 – £82,225).
If you have lived in your rental property at the same time as your tenants, you can claim Letting Relief. This rule changed in April 2020 to limit claims for the relief.
Taking in a lodger is different from renting out a home – look at the Rent-A-Room Scheme for tax breaks relating to lodgers.
Letting Relief is the lowest of:
- Private Residence Relief
- Any chargeable gain you made while renting out your home, but not gain from when the property was empty
CGT rules allow landlords to offset some property-related expenses against the tax they pay:
- Buying costs – Like conveyancing, surveys or valuations and stamp duty
- Improvement costs – Costs for adding to the property, like a loft conversion, extension or building a garage providing the improvement is still there when the property is sold.
- Selling costs – Bills for conveyancing, estate agent or auction fees
The costs are offset in full against any gain and can add up to a significant tax saving.
If you have 100% ownership and are married or with a civil partner, consider giving them a share in the property.
Under CGT rules, switching a share of ownership is tax-free, although you need to check if stamp duty may apply.
The advantage is your partner also has a CGT tax-free allowance and qualifies for PRR on their share of the property, which can double your CGT tax reliefs.
Again following our example gain of £143,000, this amount chargeable to CGT reduces by £24,300 with two tax-free annual allowances, which reflects a tax saving of £4,374 at the 18% rate.
Transferring a share of ownership is relatively cheap and easy.
You just need a sworn document from your solicitor confirming the new ownership shares of the property and a Form 17 to file with HMRC.
Moving in to a buy-to-let to save CGT
In principle, the idea works but comes with a lot of hassle.
Just crashing at a buy-to-let is different from making the property your main home for Private Residence Relief.
To call the property home, you must move your life – ie your belongings, your address for bank statements, passports, driving licences and other official documents. That also means changing your address on the voter’s roll.
In return, you can claim PRR for the time you live in the property plus 9 months – but don’t forget you lose PRR for an equal length of time on the property you are leaving.
If you are married, don’t forget couples can only have one PRR even if they live apart.
Giving away a buy-to-let and CGT
Not all gifting of buy-to-lets is CGT-free. Although transfers to a spouse or civil partner are ‘no gain, no loss’ transfers, gifts to ‘connected people’ are considered disposals at market value and taxed as such, regardless of if no price was paid or that the price was discounted.
Buy-to-Let CGT template
Now we’ve looked at the CGT tax breaks available for landlords selling a buy-to-let, here’s a template of the calculation:
|Estate agent/auction fees||x|
|CGT annual allowance||£12,300|
|Private Residence Relief||x|