Selling a property isn’t always straightforward and generally comes with a number of forms, negotiations and is subject to various expenses. Capital Gains tax is likely to be your biggest expense when selling a buy-to-let property or second home.
To help you work through how it will affect you as a landlord, we’ve put together a handy guide to explain everything you need to know.
What is Capital Gains Tax?
Capital Gains is the tax due on any profits made on the sale of an asset, such as a second home or rental property. It can also apply to assets you receive as a gift or as inheritance.
The tax only applies to the profit you make on selling something you own, and you only pay it on the total gains you make above the tax-free threshold. For example, if a landlord sells a rental property they’ll pay tax on the difference between the buying and selling price.
How much Capital Gains Tax do I need to pay?
To work out your Capital Gains exposure follow the simple three step rule by HMRC
- Work out the gain for each asset (or your share of an asset if it’s jointly owned). Do this for the personal possessions, shares, property or business assets you’ve disposed of in the tax year.
- Add together the gains from each asset.
- Deduct any allowable losses.
The tax year runs from 6 April to 5 April the following year.
You’ll need to report and pay Capital Gains Tax if your taxable gains are above your allowance.
What are the Capital Gains Tax rates and allowances?
For 21-22, everyone in the UK has a capital gains annual tax-free allowance of £12,300 a year. This means that when selling a rental property the first £12,300 of profit will be exempt from tax. If you are married or in a civil partnership, each person has a tax-free allowance meaning your total allowance as a couple will be £24,600.
|CGT allowance for an individual||£12,000||£12,300||£12,300|
|Couple’s allowance (married or in a civil partnership only)||£24,000||£24,600||£24,600|
The Capital Gains Tax rate on a property for basic-rate payers is 18% for the 2021-22 tax year. For higher and additional-rate payers, the Capital Gains Tax rate is 28%.
|Tax Bracket||Capital Gains Tax Rate On Property|
|Higher or additional-rate payer||28%|
What can I deduct from my Capital Gains Tax bill?
As well as your yearly tax free allowance, there are a few other expenses that can be deducted from your profits to determine the final taxable amount you’ll pay capital gains on.
For example, when buying and selling a property there are normally a long list of expenses such as estate agency fees, solicitor fees or stamp duty. All of these costs can be deducted from your overall profits leaving you only the remainder to pay tax on.
Similarly, if you’ve made any improvements to the property between buying and selling it, like adding an extension, converting a bedroom or installing double glazing, the cost of improvements can be deducted from the profits.
However, keep in mind that you can’t deduct any upkeep costs for example, a housekeeper salary or general wear and tear expenses. In addition, interest on any mortgage payments is also not deductible.
Work out your Capital Gains Tax bill
If, for example, you bought a buy-to-let property for £100,000 and later sold it for £120,000, your profit is £20,000. Your Annual Exempt Amount (tax free allowance) of £12,300 then kicks in, meaning you only pay Capital Gains Tax on the remaining amount, less any other deductions.
Do I have to pay Capital Gains Tax?
Capital Gains Tax doesn’t apply to every property you own and there are several circumstances that Capital Gains is not applied.
If you’re a homeowner, you won’t pay Capital Gains Tax when you sell the home you live in. But if you’re a landlord and you own a property that you’re letting out there are some exemptions you should be aware of that can prevent you from overpaying more than you owe.
You’ll be exempt from paying Capital Gains Tax if:
- you have one home that you’ve lived in as your main residence for all the time you’ve owned it
- you’ve not let part of it out (unless you’ve only had a single lodger)
- you haven’t used part of the property for business purposes
- the grounds, including all buildings, are less than 5,000 square metres in total
- you didn’t buy it just to make a gain
Most of the above exemption criteria only applies to homeowners. So, if you’re a landlord, you’ll probably need to pay Capital Gains Tax when you sell your buy-to-let property.
When am I due to pay Capital Gains Tax?
As of the 6th April 2020, you’ll need to submit a standalone Capital Gains Tax return and pay what you owe within 30 days of the sale completing. It’s important to remember that both the return and payment are due within the same 30-day period. For example, if you submit the Capital Gains return within 28 days, you’ll have two days to pay what you owe.
If you’re a Self Assessment tax payer, you’ll still need to declare this on your annual return (even though you’ve already declared in the Capital Gains return).
This method takeover from the previous self assessment protocol that was changed in April 2020.