The capital tax gains (CGT) rules for landlords have changed in recent years. CGT is one of the more complicated taxes to understand, as the charges are structured differently from other common taxes, such as Income Tax. It can be difficult to know exactly when and how much CGT you’ll be charged.
WHAT IS CAPITAL GAINS TAX?
CGT is paid on the gain, or profit, you make when disposing of a buy-to-let property. This relates to selling, giving away or exchanging all or part of the property. If you have lived in the property as your main home at any time during ownership, this makes it more complicated when it comes to calculating any CGT due.If you sell the property at a higher price than you paid for it, you’ll make a gain.
HOW MUCH CAPITAL GAINS TAX DO LANDLORDS PAY ON BUY-TO-LET PROPERTIES?
Everyone has a personal CGT tax-free allowance, currently £12,300 (tax year 2021/22). So, you won’t need to pay CGT unless your profits in this tax year exceed that amount. In the UK, you pay higher rates of CGT on property than other assets. Basic rate taxpayers pay 18% on gains they make when selling property, while higher and additional rate taxpayers pay 28%. With other assets, the basic rate of CGT is 10%, and the higher rate is 20%. Bear in mind that any capital gains will be included when working out your tax status for the year, and may push you into a higher bracket.
WHEN IS CGT PAID?
If you make a taxable capital gain from UK residential property in the 2021/22 tax year CGT on property, this must be paid within 30 days of the completion of the sale. You do this by submitting a ‘residential property return’ and making a payment on account.
HOW CAN LANDLORDS MINIMISE A CGT BILL?
You’re permitted to offset certain costs involved with buying and selling property from a gain when working out a CGT bill. These include solicitor’s and estate agent’s fees, and Stamp Duty Land Tax when buying the property. Other costs involved with improving assets, such as paying for an extension, can also be taken into account when working out your taxable gain. However, you’re not allowed to deduct costs involved with the upkeep of a property. You’re also not allowed to deduct mortgage interest (though that can reduce the tax you pay on rental income).
PROPERTY-RELATED EXPENSES LANDLORDS CAN OFFSET AGAINST THE CGT TAX THEY PAY:
Buying costs – Such as conveyancing, surveys or valuations and stamp duty
Improvement costs – Costs for adding to the property, for example, a loft conversion, extension or building a garage, providing the improvement is still there when the property is sold.
Selling costs – Bills for conveyancing, estate agent or auction fees
The costs are offset in full against any gain and can add up to a significant tax saving.
PRIVATE RESIDENCE RELIEF (PRR)
If you have lived in your buy-to-let at any time during ownership, you are entitled to make a PRR claim for the period. This is a valuable relief that may reduce CGT payable on the sale of a property that was at some point used as your only or main residence, and which has also been let as residential accommodation. This is the first full year PRR has been restricted since rules changed in April 2020. Previously, if you lived in your property before letting it to tenants, you’d get PRR when you came to sell. This meant you wouldn’t pay any CGT for the time you lived in the property, plus an extra 18 months after you moved out. Under the new rules PRR permits you to remove any CGT for the years you lived in the property plus nine months, which is a CGT-free period to allow you to sell. What’s more, the £40,000 of lettings relief (which you can claim if you rent out a property that’s been your main home) will only apply to landlords who share an occupancy with their tenants.
Letting Relief allows any chargeable gain remaining after Private Residence Relief (PRR) to be reduced further by whichever is the lower of the amount of private residence relief already calculated, £40,000, or the chargeable gain made from letting your home (and not covered by the deemed occupation provisions).
Therefore up to an additional £40,000 of a gain is currently exempt from CGT if you qualify for the relief. This is even more valuable when you factor in that Letting Relief is available per owner and not just per property, so £80,000 of the proceeds from the sale of a co-owned property could potentially be exempt from CGT.
Shared occupation applies where the owner lives in the same property as the tenant and the property is their only or main residence throughout the letting period. This means that should you move out of the property and let it to a tenant, Letting Relief will no longer apply.
If you have total ownership of a buy-to-let property and are married or in a registered civil partnership, you could consider giving your partner a share in the property. Under the current CGT rules, switching a share of ownership is tax-free, although Stamp Duty Land Tax may apply. The advantage is your partner also has a CGT tax-free allowance (currently £12,300 in tax year 2021/22) and qualifies for PRR on their share of the property, which can double your CGT tax reliefs.
To transfer a share of ownership, you need a sworn document from your solicitor confirming the new ownership shares of the property and a Form 17 to file with HMRC.
GIVING AWAY A BUY-TO-LET AND CGT
Some buy-to-let investors look for alternative ways of owning property to mitigate CGT. But there is no one-size-fits-all and careful consideration should be given to future income requirements before any assets are given away. This may include giving property away to family members who are paying tax at lower rates, or in many cases considering a corporate structure. This also ensures the rental income is taxed at lower Corporation Tax rates, therefore increasing yield, and also transfers value out of the donor’s estate for Inheritance Tax purposes. Although transfers to a spouse or registered civil partner are ‘no gain, no loss’ transfers, gifts to ‘connected people’ are considered disposals at market value and taxed as such, regardless of whether no price was paid or that the price was discounted.
ADVICE ON TAXES FOR UK LANDLORDS
Following a review of the system, a freeze on CGT could mean landlords are faced with a higher tax burden when they come to sell a property. The Office of Tax Simplification had previously recommended an overhaul of CGT on property, which includes reducing the CGT tax-free allowance and increasing Capital Gains Tax to be more in line with Income Tax rates. While this hasn’t materialised yet, it could be something we see introduced over the coming years. Buy-to-let investment properties can be extremely lucrative but they are taxed in a very specific way. Since the rules are complex and vary for different assets and individuals, it’s prudent to speak to a tax expert to ensure that you’re only paying as much CGT as you need to.