January 17, 2024 12:43 pm

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Nikka Sulton

Selling a buy-to-let (BTL) property in the UK can trigger capital gains tax (CGT) if the selling price exceeds the purchase cost. This tax applies to the profit made from the sale. However, certain circumstances may offer opportunities to either avoid or reduce the amount of CGT incurred on your rental property.

Understanding the available BTL tax relief is crucial in navigating the complexities of property transactions. By exploring these relief options, you can potentially minimize the impact of CGT on your financial returns. It’s essential to stay informed about the relevant tax regulations and employ strategic approaches to optimize your tax position when selling a buy-to-let property in the UK.


What is capital gains tax?

Capital gains tax (CGT) comes into play when selling an asset that has appreciated in value, with exemptions for certain assets like your primary residence. However, the sale of a rental property could subject you to CGT if its value has increased since acquisition. Understanding the potential CGT obligations in the event of selling your rental property is crucial, ensuring compliance with tax regulations and a clear grasp of the financial implications associated with the transaction. Being informed about CGT can aid in effective tax planning for property investments.


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

As a landlord, your income from a rental property is twofold: the rental payments from tenants and potential capital growth if the property’s value increases. However, when selling a rental property, the tax implications differ from the sale of your primary residence.

For buy-to-let property sales completed on or after October 27, 2021, subject to capital gains tax (CGT), you must notify HMRC and make the payment within 60 days of completion. Failing to report the sale and pay the tax on time can result in penalty fees and interest charges. It’s crucial to stay on top of these obligations, and having an accountant can be beneficial.

To streamline the payment process, you can make payments online through the Government Gateway site, requiring a user ID and password. If you don’t have these credentials, you can create an account when reporting CGT and making the payment. Additionally, if you usually complete a self-assessment tax return, you must include details of any capital gains at the end of the relevant tax year. This underscores the importance of fulfilling tax obligations accurately and promptly, especially in the context of property transactions.


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

The capital gains tax (CGT) rate on the sale of a buy-to-let property is linked to your taxable income. Basic rate taxpayers, with an income of £50,270 or less, face an 18% CGT rate, while higher rate taxpayers earning £50,271 or more are subject to a 28% rate. It’s important to be aware of these rates and assess your CGT obligations accurately, using available calculators to determine the applicable rate based on your property gain. This understanding is crucial for property sellers to navigate the tax implications and fulfill their financial responsibilities.


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

If you sell a property previously let out, you might be eligible for tax relief to lessen your CGT liability. Private Residence Relief (PRR) applies to the sale of your main residence, even if it was once a rental property. This relief covers the years the property served as your main residence and the last nine months before the sale. For instance, if you owned a property for 120 months, lived in it for the first 60 months, and let it out for the final five years, you’d be eligible for relief on 69 months, reducing your taxable capital gain.

Letting relief, which once helped reduce CGT for landlords who previously occupied the property, underwent rule changes in April 2020. To qualify post-change, you must have cohabited with your tenant(s) during your ownership. Landlords fitting this criteria typically already qualify for relief under PRR rules, illustrating the importance of understanding evolving regulations to navigate tax implications effectively.


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

Similar to your annual income allowance, you also have an annual Capital Gains Tax (CGT) allowance known as the annual exempt amount, currently set at £6,000. If you’re married or in a civil partnership and jointly own property, you can combine your allowances. For couples where only one person owns a property, transferring part or the entire property to the partner can help minimize the CGT liability. Additionally, deducting specific costs, such as estate agents’ and solicitors’ fees, along with expenses related to improvement work like extensions, can further reduce the taxable gains.


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

In recent years, changes in regulations, especially regarding mortgages, have impacted landlords financially in the buy-to-let market. To mitigate tax exposure, more landlords are opting to establish limited companies to oversee their property portfolios.

Profits from property sales through a limited company fall under corporation tax, currently at a rate of 19% for profits up to £50,000 (25% for profits exceeding £250,000). This approach is more financially advantageous compared to the higher Capital Gains Tax (CGT) rate. For instance, a buy-to-let landlord like Tina, facing a potential £14,000 CGT bill, could cap her tax liability at a maximum of £9,500 by selling the property through a limited company.


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

Considering changing your nominated main residence is a strategy to potentially reduce Capital Gains Tax (CGT) on your buy-to-let property, especially if it remains unoccupied for an extended period. This practice, known as flipping, allows you to alter your stated main residence multiple times within a two-year period. However, the property must genuinely serve as your main home, supported by evidence like bills, bank statements, and electoral register registration. Consultation with an accountant is advisable before proceeding, ensuring adherence to tax regulations. Married couples and civil partners can only nominate one main residence jointly, and inaccuracies may lead to penalties and tax evasion implications.


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