If you own a single of multiple buy-to-let properties, then selling a rental property could leave you open to complicated tax rules and could end up costing you a fair amount of money on any gain you make.
One of the most common questions we are asked is “Ca avoid capital gains tax when selling an investment property?” The answer can be complex as it’s often not possible to avoid paying capital gains tax when selling a buy-to-let property but you may be able to reduce your capital gains tax (CGT) bill.
First let’s look at some of the basics around capital gains tax on property.
Do I pay capital gains tax on property?
You only need to pay capital gains tax on any gain main when selling a buy-to-let property or second home. You won’t pay CGT when selling your main home.
CGT rates on property
CGT rates are as follows:
- Basic rate taxpayers will pay 18%.
- Higher and additional rate taxpayers will pay 28% on the sale of a property.
How much CGT UK will I pay when selling a rental property?
You can work out how much capital gains tax youll pay by deducting the Capital Gains Tax allowance below from your gain and then working out the rate youll pay based on if youre a basic rate taxpayer or a higher rate taxpayer.
Capital Gains Tax allowance
All taxpayers have an annual Capital Gains Tax allowance, which is a tax free allowance meaning you can earn some money without paying tax. For tax years 2021/22 and 2022/23 the CGT tax free allowance means you can earn up to £12,300 tax free. For couples, this figure could potentially be doubled, allowing you to earn £24,600 without paying tax.
When is capital gains tax on property due?
You’ll need to pay the tax you owe within 60 days of completing the sale if you’ve sold a UK property on or after 27 October 2021.
How can I minimise CGT on property?
Whilst it may not be possible to avoid paying CGT on a buy-to-let property, there are potentially ways to minimise the CGT bill. We look at some of these below:
1. Move into the property
Capital Gains Tax is not payable when you sell your main home. Therefore if you move into your buy-to-let property for a period of time, you could potentially benefit from Private Residence Relief (PRR). However, this only makes you exempt from CGT for the period of time you occupy the property and also any gains made in the final nine months prior to the sale.
You must have owned and used the property for at least two years during the five-year period ending on the date of sale. If you are single, you may avoid tax on up to £250,000 of gain, £500,000 if you are married and file jointly. If you used the residence for less than two years, you may avoid tax if you sold because of a change of job location, poor health, or unforeseen circumstances.
Note: If you use a residence as a holiday home or rental property, an allocable part of your gain may not qualify for the exclusion, even if you meet the two-out of five-year ownership and use test.
However, be cautious as HMRC can disqualify someone from claiming PRR if they feel that an individual has only done this to avoid paying tax. Another thought is that this could create future CGT issues with main residences further down the line, so is not an option we would recommend.
2. Deducting costs from your capital gain
If you buy and sell the property, you can offset some costs when you sell a buy-to-let property to reduce your capital gain, these include:
- Solicitor and estate agent fees.
- Stamp duty when buying the property.
- Improving the property i.e. adding an extension (note: you can’t deduct costs for the general upkeep of the property)
3. Hold investment properties within a limited company
There are a number of benefits of holding investment properties in a limited company including being able to deduct mortgage interest payments from your income on your tax bill and paying corporation tax on earnings, rather than income tax.
The other big benefit is when you come to sell the property. If you hold the properties in a limited company, then you’ll pay corporation tax on sale and not CGT. Corporation tax is currently 19% in comparison with CGT which can cost up to 28% for higher and additional rate taxpayers.
4. Look at alternative ways to invest in property
With changes in the past few years in the buy-to-let market and property investing then maybe this market is no longer profitable for you. It’s worth considering other ways to continue to invest and gain from any upsurge in the property market. One of these alternatives is putting money into a Real Estate Investment Trust (REIT).
A real estate investment trust (REIT) is a property investment company which, very broadly, simulates direct investment in UK property, but avoids the additional layer of taxes that can arise when investing through a corporate structure. This means you could benefit from gains in the property market without some of the issues around CGT and corporation tax that direct investment brings.
A REIT is exempt from corporation tax on both rental income and gains on sales of investment properties (and shares in property investment companies).
Shares in such an investment could be held in an ISA (subject to ISA limits) so could be exempt from tax.
However, as with all investments you could loose money, so do your homework first.
Final thoughts on CGT on property
From the day you purchase buy-to-let properties, you need to understand the tax rules that apply to both the income you receive and any future gains you make. As the buy-to-let market is further squeezed by legislation changes, now is the time to review your property portfolio, income and tax planning strategy.
A tax strategy is not a magic solution that means you pay no tax. What you really need to do is seek advice, get tax right, whilst minimising your tax bill. This means taking control of your property affairs instead of reacting to them.
Here at dns we’re experts in landlords and landlord property tax, so if you need any further help or advice then call us on 03330 886 686 or e-mail us firstname.lastname@example.org.
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