What is Capital Gains Tax on a Buy to Let Property?

As with any form of income, buy to let property investment carries various tax implications, including that of capital gains tax.

Buy to let property is generally seen as a medium to long term investment, building on the initial cost of purchase, legal fees and refurbishment to ideally enjoy regular rental income and eventually, a healthy return from capital growth.

When it comes to disposing of a buy to let property, however, whether by sale or transfer into a company, any resulting gain will generally incur a capital gains tax liability.

Changes to UK tax legislation in recent years have affected the tax situation regarding rental properties. For instance, the phasing out of offset mortgage relief for high earners has increasingly led to the transfer of buy to let property into a limited company as a means to cut levels of tax payable. Such a transfer may still incur a capital gains liability and there are likely to be other tax implications too.

 

Do you owe capital gains tax on your buy to let property?

 

Under Private Residence Relief, the sale of a main home does not trigger capital gains tax, as long as:

• you own one home only, which you have occupied during the period of ownership
• no portion of your home has been rented out, with the exception of taking on a single lodger
• no portion of your home has been used for business purposes only
• the grounds, including any buildings sited in the grounds, are under 5,000 square metres
• the property was not purchased with the intention of making a gain from its sale

Any property that is not a main residence, that is, the owner’s main home, is subject to capital gains tax. In addition to buy to let property, this could include holiday lets, business premises, land, inherited property, or second homes.

When a buy to let property is sold, capital gains tax becomes payable if the property is sold for more than it was purchased for and there is a resulting gain after allowable costs have been deducted.

Such allowable costs include:

• Solicitor’s fees
• Estate agency fees
• Stamp duty
• Advertising costs
• Improvements to the property for the purpose of raising its value
• Losses made on the sale of buy to let properties in previous years

Capital gains tax has applied to both UK resident and non-resident individuals owning rental property since April 2015, when the relevant tax legislation was altered to include non-residents within the reach of UK capital gains tax on the sale of a rental property. However, this is only for gains received since April 2015. Where a rental property was owned prior to that date, the amount subject to capital gains tax must be calculated for both prior to and after April 2015.

 

Capital gains tax rates on buy to let property

 

The capital gains tax rates relating to gains made from the disposal of assets were lowered in April 2016 to 10% for basic rate taxpayers and 20% for higher rate taxpayers.

Unfortunately, this change did not roll over to gains made from the disposal of property that is not your main home, and the corresponding capital gains tax rates remained at 18% for basic rate taxpayers and 28% for higher rate taxpayer. This effectively imposes an 8% capital gains surcharge on UK landlords.

 

Buying rental property using a limited company

 

Capital Gains Tax is applicable only to gains made on the sale of residential properties owned by individuals – and not limited companies. As such, it has become common practice for landlords to use a limited company structure to buy rental property, with a view to reducing their future CGT liability.

In addition, limited company profits from rental income are taxed under the corporation tax rates, between 19%-25%,  which is considerably lower than the 28% CGT rate applicable to higher-rate taxpayers.

 

How much is capital gains tax allowance?

 

All UK taxpayers have a tax-free allowance each year which is taken into consideration before calculating profits for the purpose of capital gains tax. This is called the ‘Annual Exempt Amount’.

For the 2022/23 tax year, capital gains tax relief was £12,300. For 2023/2024, the Annual Exempt Amount has been lowered to £6,000 per individual per year.

What this means in the case of the sale of a buy to let property is that, on an annual basis, up to £6,000 can be deducted from any profits made on the sale before capital gains tax is calculated.

Where the buy to let property has multiple owners, each corresponding owner may claim their tax-free allowance against profits made from the sale.

Of course, capital gains tax and the tax-free allowance are not the only tax implications on the sale of a buy to let property, so it is always advised to take professional advice to ensure that all available reliefs and financial liabilities have been taken into account.

 

Can you reduce capital gains tax payable on the sale of a buy to let property?

 

It may be possible to reduce or defer payment of capital gains tax when you dispose of a buy to let property, by using one of the following options:

 

Private Residence Relief

The disposal of a private residence, in essence your main home, is usually exempt from capital gains tax. Where you plan to sell a buy to let property, you may be able to take advantage of Private Residence Relief if you have used the property as your main home during your period of ownership.

To take advantage of Private Residence Relief, you must prove that the property has served as your main home for at least part of the time that you have owned it. There is no minimum residence time requirement. It may therefore be possible to claim Private Residence Relief based on the fact that the final eighteen months of ownership do not qualify for capital gains tax. This could mean a claim for full or partial relief.

Increasingly, HMRC are more stringent in their examination of Private Residence Relief claims and any evidence that you provide to prove that the property is your main home must be thorough and extensive, including:

• council tax statements
• utility bills
• entry on the voting register
• registration at your local doctor’s surgery
• DVLA documents to show that your car is registered at your address
• telephone and internet bills to prove dates of residence

 

Private Letting Relief

To be eligible for Private Letting Relief:

• you must be eligible for Private Residence Relief, even if only for part of the period of ownership
• the property has, in part or fully, been a residential rental
• there has been a chargeable gain from renting out the property

Private Letting Relief is an individual relief, therefore available to each of a property’s owners. It is calculated as the lowest amount of either £40,000, the amount of Private Residence Relief allowed, or the chargeable gain from renting out the property.

 

When is capital gains tax payable?

 

Failure to notify HMRC or to pay CGT liability on time can result in penalties and interest being charged.

CGT due is payable within 60 days of the completion date. CGT payments are made via the HMRC website.

Under previous rules, buy to let properties sold between 6 April 2020 and October 27 2021, the property owner had 30 days from completion date to notify HMRC of the sale and to make the CGT liability payment.