Can you avoid Capital Gains Tax on buy to let property?

As a landlord when you sell rental property do you take professional tax advice or full advantage of all available tax reliefs on offer to you? Many landlords may pay unnecessary tax or lose money by not taking advice.

Whilst there may not be a way to avoid Capital Gains Tax on buy to let property sales, there are certainly ways to reduce your Capital Gains Tax liability using the CGT tax free allowance, reliefs and deducting expenses such as property improvement costs.

In this blog we explore the ways to reduce your CGT bill when you sell buy to let properties.

Why do you pay Capital Gains Tax on buy-to-let property?

As the owner of a rental property, you make profit in two ways:

• Through rental income
• Through the capital gain you make if the property’s value rises and you sell the property.

Capital Gains Tax (CGT) is paid on the profit/gain you make when you sell an asset such as property that has increased in value. Some assets are tax-free, including your main home (Principal Private Residence Relief). But if the value of your buy to let property has increased since you bought it, you may have to pay CGT on some or all the profit when you sell it.

How can I reduce my capital gains tax bill?

There may be ways to reduce your Capital Gains Tax bill when you sell rental property and I explore these options below.

Ways to reduce your CGT bill on buy-to-let property

1. Use your tax-free CGT allowance

Like your personal tax allowance, you have an annual CGT personal allowance. This CGT allowance is called the annual exempt amount and is currently £6,000 (2023/24). Landlords should ensure they utilise this allowance when selling a property and have no other capital gains in the year.

2. Using deductions available on buy-to-let

There are certain costs that buy to let landlords can be deducted from any capital gain when you sell a property. These include things like:

• Costs for capital improvements such as extensions etc.
• Solicitors fees
• Estate agents fees
• Stamp Duty Land Tax (or similar) paid when you purchased the property
• Surveyors costs
• Cost of advertising to find a buyer
• costs incurred in making any valuation or apportionment required for the purposes of the Capital Gains Tax computation (accountants cost for capital gains tax return filing or computation of tax liability is not allowed)

3. Live in your own buy to let

When selling a property that was once your main residence that you have let out at some stage, you may qualify for tax relief to reduce your CGT bill.

You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if all the following apply:

• you have one home and you’ve lived in it as your main home for all the time you’ve owned it
• you have not let part of it out - this does not include having a lodger
• you have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
• the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total (unless you can prove the additional area is required for use and enjoyment of the property)
• you did not buy it just to make a gain

If all these apply you will automatically get a tax relief called Principal Private Residence Relief and will have no tax to pay when you sell the property. If any of them DO apply, you may have some CGT to pay.

Nominating a new main residence is a practice used by many landlords to reduce exposure to CGT, but you should consult an accountant before doing this.

You could consider changing your main residence if you have an un-occupied buy-to-let property as this can reduce CGT on that buy to let property (genuine occupation of the property is important or else you may not qualify for the relief) .

Doing this is known as flipping and whilst there is no limit to the number of times you can change your main residence, you must have genuinely been living in the property, as a main home, to qualify. The mere occupation a property will not in itself make it a main residence. There needs to be a permanence and expectation of continuation to the occupation to establish it as a main residence. Other rules that apply are that you and your spouse or civil partner must share the same designated main residence, you cant each elect a different one.

The period when you occupied the property will qualify for exemption from CGT. Any gains made in the final nine months prior to the sale will also be exempt, whether you lived in the property during that time or not.

You have two years from the date the combination of properties changed to notify HMRC which property is your main residence.

4. Make use of a spouses tax band

Capital Gains Tax is generally not paid when assets are transferred between spouses, so you could effectively make use of their lower tax bands.

Married couples and civil partners who are selling a rental property can also use gifting rules and their individual CGT allowances to reduce their bill. For example, if one person has already used up their allowance for the year they could gift their half of the property to their spouse, who can use their full tax-free amount. Similarly, if one of the spouse or civil partner does not have substantial income from other sources, their unused basic rate band could be utilised, the gains will be taxed at 18% instead of the 28%.

5. Use a limited company structure to minimise tax

Holding buy to let properties in a limited company, rather than personally has many tax advantages, such as being able to offset costs such as mortgage interest payments against tax bills.

Many landlords run limited companies to hold their investment property. A property investment company run as a limited company will pay corporation tax on sale of any rental properties. Corporation tax rates range from 19pc to 25pc from April 2023, but the higher rate only applies for landlords with yearly profits or gains in excess of £250,000. The Capital Gains Tax rate can be up to 28pc for higher rate taxpayers. So, in many cases, paying corporation tax via a limited company on sale instead of CGT can be preferred.

However, selling properties immediately or soon after incorporating could attract attention from HMRC, so seek professional advice.

Do I qualify for letting relief?

From 6 April 2020, the rules around lettings relief changed significantly. If a property was sold after 5 April 2020, conditions for lettings relief became tougher and the relief is only available if the owner was also living in the property as their main residence together with tenants – as a single household.

This means that if a property was fully let, no lettings relief would be available during these lettings periods as you are only eligible for lettings relief when the owner occupies the property at the same time.

How much capital gains tax will I need to pay on my property transaction?

The amount of CGT you pay on property will depend on:

• The profit you make when you sell your property.
• The rates at which you’re charged Capital Gains Tax.

The sale of residential property is subject to 18% or 28% tax. The rate at which you pay CGT following the sale of a buy-to-let property depends on your taxable income. If you are a higher rate taxpayer you will pay tax at 28%. For basic rate taxpayer with other income of less than £50,000, you will pay tax at 18% on the unused basic rate band and the higher rates once the basic rate band is fully utilised. . Higher rate taxpayers with an income of £50,001 or more pay 28%.

HMRC add your taxable gains to your income and this determines the Income Tax band you fall into the year you made your sale. Therefore, basic rate taxpayers should seek advice before they decide to sell a buy to let property as the gain or profit from selling the property will be added to your income and could push you into to higher-rate tax band.

To work out how much Capital Gains Tax you’ll pay, you will need to calculate your:

• Total taxable gain - i.e. the profit you’ve made on the sale of the property.
• The taxable gain less any deductible expenses and your CGT allowance (if you havent previously used this allowance).
• Your personal tax threshold (determined by total income and gains you make in a tax year), this determines the rate of CGT youll pay.

EXAMPLE:

• You purchase a property for £200,000
• You sell the property for £400,000
• You spent £20,000 on Stamp Duty and agency fees
• You spent £40,000 improving the property
• Your total taxable gain or net profit is: £400,000 – £200,000 = £200,000
• Your taxable gain after your expenses is: £200,000 – (£20,000 + £40,000) = £140,000
• Your taxable gain after your expense and allowance is: £140,000 - £6,000 = £134,000

How do you pay Capital Gains Tax?

To work out when you need to pay Capital Gains Tax you need to work out your taxable gains and if it’s above the Capital Gains Tax allowance, you need to report them to HMRC.

You must report and pay any Capital Gains Tax on most sales of UK property within 60 days.

Use a Capital Gains Tax on UK property account to:

• report and pay any tax due on UK property
• view or change a previous return

You’ll need a Government Gateway user ID and password to set up your account or sign in. If you do not have a user ID, you can create one the first time you sign in.

If you do not pay when you report, you can pay after you report your gains by:

• approving a payment through your online bank account
• online or telephone banking
• debit or credit card
• cheque

Summary

If you sell a buy-to-let property and make a profit from the sale, you make a ‘capital gain,’ which may be taxed (CGT). Whilst you may not be able to avoid paying tax, in some cases, you may be able to lower the amount of CGT that you pay.

Here at dns accountants we advise people on paying Capital Gains Tax on the sale of buy to let properties regularly. We have many landlords and property investment companies as clients and have experts to assist and advise you and help you to minimise your CGT bill.

Contact our team on 03300 886 686, or email on enquiry@dnsaccountants.co.uk for more help and advice on Capital Gains Tax and tax planning.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.