Investing in property to rent can result in attractive financial gains, but it does inevitably complicate your tax affairs. Capital gains tax on a buy to let property is just one of the tax liabilities landlords may have to contend with over the course of property ownership.
For the highest returns, buy to let properties are typically treated as medium to long term investments. Whatever your plans, there may come a point when you are looking to dispose of your asset(s), whether to another party or by transfer into a company. It’s usually at this point that capital gains tax on a buy to let property is triggered.
For example, recent changes in UK tax rules affecting buy to let properties, such as the phasing out of offset mortgage relief for higher earners, have precipitated many property owners transferring ownership of their rental properties into a limited company to try to reduce the inflated tax burdens of owning rental properties.
This is despite the fact that a transfer into a company, notwithstanding the availability of any reliefs, will potentially result in a capital gains tax on the difference between the original purchase price and its current value. Of course, there will also be other potential tax implications that might be triggered.
How do I know if I have to pay capital gains tax on a buy to let property?
Capital gains tax on a buy to let property is triggered on the sale of the property in question, where the sale price is higher than the price that was paid, less allowable costs such as:
- Stamp duty
- Solicitor’s fees
- Estate agent’s fees
- Costs involved in advertising the property for sale
- Costs incurred in increasing the property’s value (improvements, not maintenance or general upkeep costs)
- Past losses on buy to let properties sold in previous years
Since April 2015, CGT has applied to both UK resident and non resident property owners; the general basic jurisidictional limit for CGT purposes which excludes non resident was expanded in relation to UK residential property. As such, a non resident vendor of UK residential property will have a liability to UK CGT but only on any part of a gain which has arisen since 6 April 2015. This means that, where the property was held before this time, one must slice and dice the gain before and after this date.
Beyond buy to let property, capital gains tax applies to all property that is not deemed the owner’s ‘main residence’, which includes second homes and holiday lets.
Properties elected as the owner’s main residence, or are the owner’s main residence as a matter of fact, will enjoy CGT exemption under the Private Residence Relief scheme. However, the corollary of this is that one does not relief for any capital loss that arises on a main residence, unlike if such a loss arose on the sale of an investment property.
Recent changes in rules affecting buy to let owners
In April 2016, the capital gains tax rates for profits made from assets such as stocks and shares were lowered:
- for basic rate tax payers – was 18%, now 10%
- for higher rate tax payers – was 28%, now 20%
These reductions in CGT were not however applied to chargeable gains arising on the disposal of residential property that does not qualify for private residence relief.
The CGT rates for buy to let property therefore remain at the higher levels, with landlords essentially being hit with an 8% surcharge on profit:
- for basic rate tax payers – 18%
- for higher rate tax payers – 28%
All taxpayers have an annual tax-free allowance of capital gains that can be used each tax year before incurring a capital gains tax charge.
The current annual CGT exemption rate has been set as follows:
- 2017/18 £11,300
On the sale of the property, less the expenses noted above, you are able to take from the profit the CGT exemption, subject to the annual limit.
Each of the property owners is able to claim a CGT exemption, again, up to the annual limit.
In reality – very few cases are as straightforward as this, with additional reliefs and liabilities to take into account. Seeking advice is the safest way to take a tax-efficient approach to the transaction.
Reducing capital gains tax on a buy to let property
When you dispose of a buy to let property, it will be worth ascertaining if you are able to reduce or defer your capital gains tax liability. There are some options available which may be worth considering in light of your circumstances and wider objectives:
Private Residence Relief
Private residences benefit from CGT exemption. If you own a property as a buy to let, and you are planning to sell the asset, you may be able to take advantage of private residence relief if you have lived in the property for a period of time.
If you can evidence that the property has been your main residence at some point during your ownership – and note there is no minimum time requirement on the period of residence – you may be able to claim relief on the basis of the last 18 months of ownership being CGT exempt.
HMRC have become more proactive in investigating private residence relief claims. You will need to prove that the property is or has been your main residence – through for example Council tax records (the process for altering main residence for Council tax purposes is equally rigorous), registering at the doctors, utility bills, voting register.
Private letting relief
In addition to private residence relief is ‘letting relief’.
To be eligible for letting relief, private residence relief must be available to you, part or all of the property has at some time during your ownership been let as residential accommodation and a chargeable gain arises by virtue of the letting.
The figures involved are not insignificant. With letting relief you can claim the lower of the amount of private residence relief available in respect of the letting; or £40,000; or the amount of the gain arising by reason of the letting.
Again, relief is available to each of the individual property owners.
Changes to Capital Gains Tax on a buy to let property
Changes to the reporting and payment requirements on owners of buy to let property are scheduled for 2019.
Currently, as with income tax, any gain is declared on your Self-Assessment tax return. Under the present rules, capital gains tax is payable on the 31st January after the tax year you made the gain, i.e. when you sold the property.
From April 2019 however, any capital gains tax due on the disposal of residential property will be required to be reported and paid within 30 days of the completion of the disposal.
Properties enjoying private residence relief on capital gains are not affected by these changes.
Enterprise Tax Consultants can help with capital gains tax on buy to let property
With further limiting changes already scheduled for coming years, landlords continue to bear the brunt of increased tax burdens.
Before considering disposing of properties, you should look at both your long-term goals and the current property market. Ensure your exit strategy takes into account the raft of tax liabilities that can be triggered by the transaction, most notably capital gains tax – and importantly, that you are acting in line with the most recent rules.
We are helping property investors, both UK and non-resident, and buy to let owners review their tax planning to help identify all tax liabilities (SDLT, income tax etc) and potential reliefs while meeting their commercial goals in a responsible manner.
Our services include:
If you have a question about capital gains tax on buy to let property, get in touch.