Here's What Landlords Selling Up Need to Know About Tax
If you're a landlord and you're thinking of selling your rental, then it could potentially lead to a big tax bill. Here's what you need to know.
What tax do you pay when selling a buy-to-let?
Capital Gains Tax (CGT) is a tax charged on the gain you make when you sell certain assets.
CGT is payable when you make a gain on selling an investment property, including a buy-to-let.
CGT isn't payable when selling your own main home.
As the name suggests, you don't have to pay CGT on the entire sale amount, only on the gain you have made since you bought it.
If you have owned a property for some time that gain could be much larger than you think. The UK House Price Index suggests average prices have almost doubled in 20 years.
(CGT doesn't apply if you sell a property you own through a limited company. Corporation Tax applies to any profits your company makes instead.)
How much is the tax likely to be?
The rates of CGT are different to income tax rates. However, the rate you pay also depends on your income tax rate. (Your property gain is added to your other income to find this.)
Basic rate taxpayers pay 18% on residential property gains.
Higher rate and additional rate taxpayers pay 24% on residential property gains.
Scotland: Note that CGT rates are the same in Scotland as in the rest of the UK.
But Scottish income tax rates and rate bands are different.
(Tax rates may be changed by the government in the Budget or at any other time.)
Tax allowances and reliefs you can claim
There are several allowances or reliefs you can claim. These may reduce the amount of CGT you're required to pay when you sell your property.
Everybody has a CGT allowance. This is currently just £3,000 a year. Partners who jointly own a property can combine their annual allowance.
You can deduct some of the costs related to buying the property from any taxable gain you have made. This includes Stamp Duty, conveyancing costs, survey costs and some finance-related fees paid when you purchased it.
You can deduct the costs of selling the property, including estate agent's fees and conveyancing costs.
If you have made any capital improvements to the property (such as an extension) then you may be able to deduct the cost of those from the gain you have made.
But it is important to know:
- You cannot deduct the interest you have paid on a mortgage on the property from the amount of CGT payable.
- You cannot deduct routine maintenance and repair costs.
- If you lived in your rental for some of the time you owned it, you may be able to claim what is known as private residence relief for that time, subject to certain conditions. This may also apply if you had a lodger/just let part of the property.
- You don't have to pay CGT if you are gifting property to your partner.
- Lastly, you can claim for losses in some cases. You may be able to offset gains on one asset with losses on another. You may be able to set gains against losses in previous years or carry losses forward.
How and when you must pay CGT
You won't be automatically sent a bill for CGT when you sell your buy-to-let.
You are responsible for reporting any gain you have made above your annual allowance. You'll need to do this and pay any tax you owe within 60 days of the sale going through. If you don't you may be charged penalties and interest.
You can do this on the Gov.uk website here.
Take expert advice
We cannot stress enough that selling a buy-to-let is a big decision. CGT is a complex subject, and the rules change from year to year. As well as the loss of regular rental income, selling your property could land you with a substantial tax bill.
Before you decide to sell your rental, it is essential to take individual advice from an accountant or financial adviser on the tax implications. Tell them about your property and your financial circumstances, and they can explain your tax liability.
While we can't give financial advice, if we can help with any other aspects of letting or managing your property, please do not hesitate to contact us.
We hope you've found this article interesting. If you know a landlord who might find it useful, please share it with them.
This article is only a general guide and does not constitute financial advice.