Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
Becoming a landlord has been far more popular in recent years, with more property-owners than ever before taking advantage of buy-to-let mortgages or just using their savings to buy.
This means that there is an increasing number of people who will need to dispose of a property at some point.
There are lots of reasons why you might not want a property any longer but when it comes to disposing of rental property, there is more to consider than just putting up your property for sale.
Capital Gains Tax is a factor when selling a second property but there are legal ways to reduce your liability. Our guide outlines what you should look out for when disposing of a property, and how to minimise your tax bill.
Understanding Capital Gain on Selling a Property
One of the most significant aspects that you will want to take into account is the capital gain on selling a property.
Capital Gains Tax (CGT) is payable on certain assets and applies to the “gain” in value which is made at the point of sale. CGT applies to property, but not usually to your main home. As selling a property rental is not a primary residence, CGT will be a consideration.
If CGT applies to the sale, you only have 30 days to let HMRC know and to submit payment. This period runs from the date of completion. Previously CGT gains could be reported on the tax return but the law changed in April 2020 to require a quicker report and tax payment.
The tax due on a capital gain after selling a property depends on your normal taxable income. If you are a basic rate taxpayer you will pay a different rate to higher rate taxpayers. This is subject to change but the current rates (2021) are 18% and 28% for residential property. The rates that apply to residential property are higher than for other assets (currently 10% and 20%).
The liability is based on the gain, not the total value of the asset so the bill may not be as high as you think. There are also reliefs you may be eligible for which will reduce the CGT liability further.
How to Reduce CGT When Selling a Property Rental
No one wants to pay more tax than strictly necessary so it is a good idea to explore the different types of relief which are available for CGT.
Private Residence Relief
If the property was ever your main residence, Private Residence Relief (PRR) could apply. This type of relief is available for the time that you spent living in the disposed property; CGT will apply to the period when it was rented out and no longer your main abode plus a nine month period that HMRC also exempts.
To calculate how PRR affects your tax liability, you should work out the total gain and divide it by the total number of months since you purchased the property. This gives a monthly gain figure. Multiply the monthly gain figure by the number of months that the property was rented for, deduct nine months, and this provides the sum on which you must pay CGT.
For example, if the gain on a property was £100,000 and you had owned the property for 100 months, the amount per month would be £1,000. If you lived in the property for 60 months and only rented it out for 40 months, the amount liable to be assessed for CGT would be £31,000 due to the extra nine months exemption.
The calculation for this would be: £100,000/100 months = £1,000 per month x (40-9) months = £31,000.
Previously, there was a second type of relief available known as lettings relief. This was generally viewed as a tax loophole that landlords could use, but the legislation was tightened up in April 2020. In order to benefit from this type of relief, landlords must be living in the property at the same time as the tenant.
You can get the lowest of the following:
- the same amount you got in Private Residence Relief
- the same amount as the chargeable gain you made while letting out part of your home
Once you have deducted any available relief, you can reduce your CGT bill further by using your tax-free allowance. Everyone has an annual allowance for CGT, which works in a similar way to the annual personal allowance for income.
The CGT allowance is subject to change but the current rate is £12,300 (2021). This means the first £12,300 of any capital gains will not be subject to tax.
Using the example from above where we calculated a capital gain of £31,000, once the personal allowance is deducted, it leaves just £18,700 subject to CGT.
If you are married or in a civil partnership and the property is owned jointly, it may be possible to use both of your personal allowances, effectively doubling the tax-free amount.
It is possible to reduce the CGT liability further if there are any allowable deductions. Not all deductions are allowable, but some examples which can be included are:
- Original stamp duty paid
- Fees from estate agents and solicitors
- Valuation and survey costs
- Any improvements done on the property, such as an extension or roof repairs
The sum of any allowable deductions is subtracted from the total value of the gain. The personal allowance is then applied, and only the balance is subject to CGT.
Returning to the previous example with the gain of £31,000, if an extension had been constructed for £30,000, this would be deducted to leave £1,000. Once the personal allowance of £12,300 is applied, there is no amount left which is liable for CGT. You cannot carry forwards any unused tax losses.
Disposing of Rental Property at the Right Time
As can seen from the above, there are many legitimate mechanisms which can help when disposing of a rental property. However, to maximise what is available, you may need to consider when you sell.
The personal allowance for capital gains applies to all types of assets, so if you have already disposed of other assets - such as stocks or shares - you will have eaten into the available allowance.
If this is the case it may be preferable to delay selling your rental property until the next tax year where you can apply the full allowance.
If you are a higher-rate taxpayer and your income is due to fall imminently, it may also be advisable to delay the sale to qualify for a lower rate of CGT. Or CGT tax rates may rise or fall due to Budget announcements which can dictate when you sell.