When buying and selling property, there is almost always a charge, tax, or otherwise hidden cost to take into account. It can quickly get confusing, and knowing how to potentially avoid some of these can simplify matters greatly.
Here we take a closer look at Capital Gains Tax: what it is, where it applies, and how you might be able to avoid paying it on a buy-to-let property.
What is Capital Gains Tax?
Capital gains tax refers to a tax that you might pay on the sale of a property. Whether or not you’re liable for it depends on how much your asset has appreciated. In other words, how much value has your property gained in the time between first purchase and sale?
Despite the focus of this article, Capital Gains Tax doesn’t just apply to property. It applies to the sale of any high-value possessions valued over £6,000 (except for your car).
Capital gains tax is of particular note to consider with buy-to-let properties due to the likelihood of property being bought and then renovated in order to make it suitable, or at least more comfortable, for tenants. These renovations naturally increase the value of the property.
Let’s not forget that house prices have increased over time, and a property may ‘naturally’ appreciate in value through changes in the market. Whether the gains are through hard work or good luck, you may be liable to pay tax on them all the same.
Capital Gains Tax doesn’t typically apply to the sale of your primary residence where you’ve been living, so it won’t normally cut into a straightforward chain wherein you’re selling your home to buy another.
For those registered for Self Assessment tax returns, you need to report your gains if ‘the total amount you sold the assets for was more than four times your allowance‘.
How much Capital Gains Tax is charged on a buy-to-let property?
That depends on the ‘gains’ themselves. Note that the gain on a property is the difference between purchase and sale price, not the total sale. If you buy a property for £150,000 and sell it for £175,000, you’ve made a gain of £25,000, not of the full £175,000.
It’s this gain amount that may be liable for taxation, so as long as you’ve made a profit on the sale of the property, Capital Gains Tax shouldn’t cause an overall loss—but it still theoretically could.
Higher-rate taxpayers are charged for Capital Gains Tax at a rate of 28%; lower-rate payers are charged at 18%. This must be understood fully by any landlord looking to sell a buy-to-let property, as any profit will be added to your income. This means that the gains on a property sale could actually push you from the lower bracket to the higher, meaning you end up paying more.
When do I have to pay Capital Gains Tax on a buy-to-let property?
Once your gains exceed the tax-free threshold amount, you’re liable to pay Capital Gains Tax on the excess, depending on your rate as described above.
However, you can offset various costs such as estate agent fees and stamp duty, which may help keep you away from this threshold (read on to see possible ways to avoid Capital Gains Tax).
You won’t receive a bill from HMRC for Capital Gains Tax. You need to work it out for yourself when you sell a property and calculate whether you’ve breached the tax-free amount.
It’s then up to you to report it and pay.
You have a fairly healthy time to work this out and report for a residential property sale in the UK, being 60 days on or after the completion day.
Is there a penalty for not paying Capital Gains Tax?
Penalties do apply if you don’t file and pay your Capital Gains Tax, and these worsen the longer you take to report your gains.
Missing the filing deadline generates a £100 fine for each return. For ‘disposal’ dates after October 27 2021, this deadline is the 60 days described in the section above.
If you’re three months late, you incur a £10 daily fee up to a maximum of 90 days. This means a maximum £900 penalty, but this is only up to six months.
For being six months late, you incur the greater amount of either £300 or five per cent of the tax due. Once the delay reaches 12 months from the due date, the penalty depends on the behaviour of the taxpayer.
Like the six month penalty, the taxpayer is liable for £300 or five per cent of the tax amount—whichever is greater—unless the taxpayer is found to be deliberately concealing information that HMRC needs to process the tax.
If the necessary information is being withheld in a concealed manner, the penalty will be the greater amount of either £300 or 100 per cent of the tax due.
If the taxpayer is deliberately withholding information but not in a concealed manner, it will be the larger amount of £300 or 70% per cent of the tax due.
There can be further penalties to taxpayers if there are errors and mistakes in the filed return, especially if poor or uncooperative behaviour frustrates the process of correcting these errors.
Penalties can often be appealed, but it is always best to simply work out your capital gains in good time and pay the due amount well within the deadline to avoid any stress and confusion.
How to avoid Capital Gains Tax on buy-to-let property
There are plenty of legal and rule-abiding ways to lessen or even avoid Capital Gains Tax altogether.
The most basic of these is to make good use of your tax-free allowance. While a large appreciation in a property’s value isn’t something you can necessarily control, making the sale in a year where you have the full allowance is advisable, and you may want to delay a property sale to see that this happens.
Additionally, married couples and those in civil partnerships can combine their personal allowances to create a joint tax-free allowance of £24,600. This can be an especially useful provision for landlords whose significant others don’t utilise their tax-free allowances for themselves.
Certain costs can be offset against Capital Gains Tax. These are known as ‘allowable costs’ and include:
- Solicitor and estate agent fees
- Stamp duty from the original purchase
- The costs of improvements and renovations, like an extension or any work undertaken to improve the property’s energy efficiency
Note that you can’t offset the regular costs of running the property and maintaining it, nor can you offset mortgage payments.
You can benefit from Private Residence Relief (PRR) by using your buy-to-let property as your primary residence before the sale, but this isn’t something that can simply be done a month or two before putting it on the market.
Under PRR, you can claim for the years you’ve lived there as well as the nine months before the sale. You don’t need to have lived in the property for the whole duration of ownership, but you can only claim for the time in which you actually lived there.
This will be worked out by dividing the profit from sale by the duration of ownership (in months), multiplied by the number of months you lived there. Remember that you can also add up to nine of the months preceding the sale if you weren’t living in the property during those months.
Through this you can calculate what portion of the gain is liable for Capital Gains Tax. Similarly, if you let out part of your home and lived in the rest, you can work out what proportion of the property you were occupying to figure out how much relief you can claim.
If you’re unsure, it may be best to get the help of an accountant or an experienced estate agent to help you work this out correctly and get the right information to HMRC.
Where can I get advice on Capital Gains Tax for buy-to-let?
At MCC Accountants, our team have the expert knowledge needed to give you the most accurate and up-to-date advice on matters like Capital Gains Tax, buy-to-lets, and more.
With offices in Salford and Cheadle, we can help you with your next property enquiry and its taxation.