Your guide to Capital Gains Tax for landlords

The Office of National Statistics (ONS) have released data confirming there are around 2.82 million landlords in the UK. Of those landlords the main reason for becoming a landlord were: 

• 42% had a preference to invest in property 
• 40% were using their investments to contribute to their pension 
• 35% used the property to supplement their income 

With a new Government in place in the UK following a General Election, and the suggestion of rising Capital Gains Tax rates, some landlords will be considering whether now is the time to sell up. 

What is Capital Gains Tax for landlords? 

Capital Gains Tax (CGT) is the tax on the profit/gain made from disposing of an asset that has increased in value. A chargeable disposal for CGT can mean selling, transferring, gifting and disposing of. 

For UK landlords, this means paying tax on the profit from selling a property. This includes buy-to-let properties and can include properties that were once their main residence. 

Overview of CGT rates for landlords 

The CGT rates for landlords depend on their income tax band. The income tax bands are based on your total income. If your total income and gains are within the basic rate band the CGT rate on residential properties is 18%. If your total income and gains push you into a higher rate tax band you will pay CGT at 24%. 

Most individuals, personal representatives and trustees for disabled people have an annual exempt amount (tax-free allowance) of £3,000. A lower annual exempt amount of £1,500 is applicable to most other trustees. 

CGT reliefs and exemptions for landlords 

Here we explore the CGT reliefs available for landlords and property owners. 

Private Residence Relief (PRR) and how it works 

Private Residence Relief (PRR) is usually available where the property was your main residence at any point during ownership. PRR exempts the gain for the period you lived in the property and can reduce your CGT liability.  

The relief has rules and exemptions so ask a professional for help when calculating your reliefs. If a property was your main residence throughout ownership, it is likely that there is no CGT liability.  

Having a clear list of dates throughout ownership is crucial. This list should indicate when you used the property as your main residence, when you rented it out, and when it was empty.  

Letting Relief and how it is calculated 

Letting Relief is available if you let out part of your main residence while living there. You must be living in the property at the same time as letting out part of it. 

How to calculate Capital Gains Tax for landlords 

Capital Gains Tax can be complicated, particularly when calculating gains and reliefs. We suggest consulting with an accountant to make sure you calculate the gain accurately and include all relevant costs. Your accountant can also make sure you’re claiming reliefs correctly. 

Step-by-step guide to calculating CGT liability 

1. Calculate the gain: Subtract the purchase price and allowable costs (e.g. legal fees) from the sale proceeds. 
2. Annual Exempt Amount: Deduct the annual exempt amount from the gain. 
3. Other reliefs: Calculate and deduct other reliefs from the gain. 
4. Calculate the tax: Apply the appropriate CGT rate based on your income tax bracket to the remaining gain. 

CGT calculation examples 

Example 1: A basic rate taxpayer sells a property with a gain of £20,000, which does not push them into the higher rate band. After deducting the £3,000 allowance, the taxable gain is £17,000. The CGT owed at 18% is £3,060. 

Example 2: A higher rate taxpayer sells a property with a gain of £100,000. After deducting the £3,000 allowance, the taxable gain is £97,000. The CGT owed at 24% is £23,280. 

Minimising Capital Gains Tax liability for landlords 

Strategies for Reducing CGT Liability 

Holding on to properties 

Holding onto properties for longer may allow you to benefit from PRR and Letting Relief. This may reduce your CGT liability when you eventually sell. 

Tax planning with your accountant 

Working with your accountant will help you stay ahead of upcoming tax changes. This could include tax bands, tax rates and CGT reliefs which will affect your gain and tax liability. Structuring and spreading disposals to make use of your annual exempt amount for each year is beneficial. 

Using losses against gains 

If you have capital losses from other assets, you may be able to offset these against your gains. This will reduce the amount of CGT payable. 

Transferring property ownership 

Transferring ownership to a spouse or civil partner may be advantageous for various reasons. A transfer between a spouse of civil partner does not attract capital gains tax. If you're considering transferring property ownership, you should seek financial and legal advice. 

Reporting and paying Capital Gains Tax for landlords 

How to report a property gain and CGT liability 

UK and non-UK landlords must report and pay CGT when selling a UK residential property within 60 days of completion. This deadline applies to both residents and non-UK residents. While UK residents must only report a disposal where there is a gain, non-UK residents must always report the disposal. This means that reporting your gain and liability can’t wait until your self-assessment tax return. 

To report and pay online you can create a Capital Gains Tax on UK property account with HMRC. You’ll need to know: 

• the address and postcode of the property 
• the dates you purchased and sold the property (date of exchange and completion) 
• the value of the property when purchased and sold or disposed of 
• additional allowable costs when buying and selling the property 
• CGT reliefs and exemptions applicable 

You can complete a paper form if required, you’ll need to request this from HMRC. 

You must also report the property sale on your Self-Assessment tax return. 

CGT deadlines and penalties for a residential property disposal 

Failure to report and pay CGT on time can result in penalties and interest charges. Meeting the 60-day CGT reporting deadline will ensure you avoid these additional costs. 

How TaxAssist Accountants can help 

Our accountants keep up to date with CGT rates, allowances and reliefs for landlords so we can help you can make informed decisions. Call our tax experts on 01453 373123 or use our online contact form. 

Last updated: 6th August 2024