Helpful Capital Gains Tax Advice for Landlords

We all know that the only two certainties in life are death and taxes. One of the taxes that landlords need to be aware of is Capital Gains Tax, as they will probably be liable for this when they come to sell their rental property.

Any profits made from owning a property that is not your main home can be subject to Capital Gains Tax and so it is important to understand how much this is likely to be before you make the investment and when you decide to sell.

In this article, our team of Chartered Accountants, share their advice on Capital Gains Tax for landlords and outline some essential advice on how to deal with it.

What is Capital Gains Tax?

We are all subject to many different types of taxation, and Capital Gains Tax (CGT) is applied when you sell an asset that has increased in value. As you receive more than you paid for it, you will be deemed to have made a profit, and you will be required to pay Capital Gains Tax on the gain that you made, not the whole amount.

Capital Gains Tax applies to most possessions worth more than £6,000, with the exception of your car, any property that is not your main home, your main home if you have let it out, used it for business or it is very large, any shares that are not in an ISA or PEP, as well as any business assets.

You are only required to pay Capital Gains Tax on your total gains that are above your annual tax-free allowance, which is £3,000. As the majority of landlords make much greater gains than this, most of them can expect to pay some amount of Capital Gains Tax.

Capital Gains Tax for landlords

When you purchase a buy-to-let property, it is important to think ahead to the point when you sell it and the Capital Gains Tax that you might incur and decide whether you will be making the purchase as a sole trader or a limited company. If you have opened up a limited company to hold your properties, then it will be known as an incorporation.

Landlords who are unincorporated and own their properties directly will most likely need to pay Capital Gains Tax when you sell any of your rental properties. If they are owned by a limited company then you will not be required to pay Capital Gains Tax, but you will be liable for Corporation Tax, and so you will need to calculate what each bill is likely to be in order to decide which route is best for you.

Paying Capital Gains Tax

When you sell a property that is not your main home you will need to report this and pay the Capital Gains Tax when the sale goes through. If you sell your main home, then you may be eligible or Private Residence Relief when it comes to some or all of the gains. If you have let your home out at any point, or used it for business purposes, then you should report any gains to HMRC and may still be entitled to partial relief.

If you transfer property into an incorporation that you have set up to manage your property, then you may have to pay Capital Gains Tax when you complete this.

It is important to remember that it is your responsibility to report your gains to HMRC and determine what Capital Gains Tax you will need to pay, as this is not something that HMRC does for you automatically. You will have 60 days from the completion date to report your sale to HMRC. In order to do this, you will need the full address of the property and details about when you bought the property and how much you paid for it, as well as when it was sold and the price that you got for it.

You should also report any costs associated with buying, selling and improving the property and tax relief you can claim.

You will then need to calculate the capital gain that you have made and pay any tax that you own through your HMRC Government Gateway account. You will also need to include any capital gains on your Self Assessment return.

The requirement to report any capital gains from property sales separately within a 60-day window was brought about in April 2020, and a failure to do so within the deadline can lead to late filing penalties as well as late payment penalties and interest charges.

Changes to be aware of

In the 2024 budget, the then Chancellor, Jeremy Hunt announced that he would be cutting the rate of Capital Gains Tax charged on the sale of second homes. The changes came into force in April 2024, and have meant that the Capital Gains Tax rate for higher rate taxpayers will be cut from 28% to 24%, however, the basic rate taxpayers will still be paying a rate of 18%. This means that the Capital Gains Tax on property is now closer to the 20% level charged for other investments.

In the UK, many landlords now fall into the higher tax bracket as soon as Capital Gains Tax is added on to their usual salary.

The idea behind the changes was to support the housing market by encouraging more landlords to sell their properties and make them available for homeowners.

However, alongside this, the annual tax-free allowance fell from £6,000 to £3,000 meaning that the taxable gains will be £3,000 larger, so landlords will have to do their own calculations to determine whether they are really better off.

A buy-to-let property is an important investment, and so before deciding to sell it, you must do all of your calculations to work out how much tax you will be liable for. This can help you to determine when the best time to sell in order to maximise the amount of money you will actually get in your pocket at the end of it all.