Planning on selling properties? How you can get on top of Capital Gains Tax
This is an advertising feature written by St James' Place.
Capital Gains Tax, or CGT, can trip many of us up. It’s a tax on the profit, or ‘gain’ that you make when you sell or even gift an asset that’s increased in value.
If that asset is a rental property, you may need to pay even more CGT than before.
It’s already a challenging time for landlords. With rocketing interest rates on mortgages, and the cost of living crisis, over 50% of landlords were planning to sell a property last year.1 Every time you sell a buy-to-let property, you need to declare and pay any CGT within 60 days of completion date, or risk penalties and fines.
This April, the CGT allowance – the amount you can offset against any profit you make on a property sale – dropped from £12,300 to £6,000. That will halve again in April 2024 to just £3,000. Which means even more landlords are considering selling sooner, even though the rental market is buoyant at the moment.
It’s a complicated area of tax-planning. Some people pay who don’t need to pay, while others forget to declare their gains, and may even face fines.
Which is why it’s wise to get your head around CGT and take financial advice, so you don’t end up paying more than you need to.
What is Capital Gains Tax?
If you’re just starting out as a landlord, you might not know that much about CGT. It’s the tax on the profit, or gain, that you’ve made while you’ve owned the asset. It’s not a tax on the total sale price itself.
Almost any personal possession can be subject to CGT, from shares and investments to buy-to-let properties, furnished holiday lets, jewellery and antiques. But some are exempt, such as your main residence, your car, and any shares or investments held within a pension or an ISA.
How much CGT will I have to pay if I sell one of my investment properties?
This depends on your income, and your marginal tax rate.
As a landlord, if you pay the basic rate of income tax and the gains you’ve made are still within the basic-rate band, you’ll pay 18% CGT. If you’re selling a personal asset such as investments, cars or high value items, it’s only 10%.
If you’re a higher-rate taxpayer, or your gains combined with your income bring you into the higher rate, you’ll pay 28% on gains made by the sale of residential property. And 20% if you dispose of other assets. So it’s clear that landlords do bear a bigger tax burden than most.
So, if you bought a buy-to-let ten years ago for £100,000 and sold it today for £150,000, your capital gain would be £50,000 (ignoring any allowable expenditure). Once you’ve deducted £6,000 of tax-free allowance, you’d be left with £44,000 gain, taxable at 18% if you’re a basic rate taxpayer. So you’d owe £7,920. If you’re in the higher tax bracket, your gain is taxed at 28% and you’d owe £12,320.
How do I declare capital gains?
When you sell assets and made gains of more than £6,000 this tax year, you must declare it to HMRC.
How and when you do this depends on the asset or assets you’ve sold.
If you sell a property and it completed after 27 October 2021, you have just 60 days to report your gain and pay the tax due (before that date it was only 30 days).
To do this, you’ll need to set up a Capital Gains Tax on Property account on the government website (https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020)
HMRC works out how much CGT you owe, how to pay it and when the deadline is.
Can I cut my CGT bill?
You’ve got a number of options if you want to reduce the amount of CGT that you pay. It will, however, be highly dependent on your personal circumstances, and you may need to manage the reduction over time – which is why expert financial advice is very important when it comes to CGT.
• You could set up a limited company to manage your portfolio
Setting up a limited company, even if you only have a few properties, can help mitigate your tax bill. Gains made by selling properties through a limited company are subject to Corporation Tax, rather than CGT. The current rate of Corporation Tax is 19% – so if you’re a higher band tax payer you’ll have a smaller tax bill.
• You can increase your pension contributions
The amount of CGT you pay is linked to your rate of Income Tax. So if you pay more into your pension, you’ll be reducing your taxable income – which may alter your tax band, and thus the rate of CGT that you’re charged. With a 10% difference between basic and higher rate CGT for landlords, that can be a good option.
• You can make full use your annual allowance this tax year
With CGT, you can’t carry forward any unused allowance from the previous year. And since the allowance is set to drop by 50% in 2024/25, you may consider selling properties now, rather than waiting another year. Especially as the housing market seems to be slowing. But if you sell your assets gradually over a number of years, instead of all at once, you can benefit from the annual allowance each year.
• You can make a ‘capital improvement’ to your property
If you make, or have made, improvements to your property such as converting a loft, building a garage, upgrading a kitchen you may be able to write these off against your CGT liability when you sell. If it was a ‘running repair’ however, you won’t be able to.
What if I make a loss on my property sale?
Less likely at the moment of course, but it’s worth noting that some property assets don’t always go up in value.
If you make a profit when selling one house, but a loss when selling another (or indeed when selling any other asset), you can deduct the loss from your gain when calculating how much CGT overall you need to pay. And – bonus – you can also carry forward any losses that haven’t been used to offset future gains, provided the loss has been claimed. To be allowable a loss must be claimed (in the tax return or by writing to HMRC) within four years.
Even if you don’t owe any CGT, it’s still a good idea to declare (claim) any losses. Once a loss has been claimed it can be carried forward indefinitely, until you have capital gains against which it can be offset.
What happens about CGT if I sell my buy-to-let limited company?
If you’re a sole trader or business partner and you’ve owned the business for at least two years, you may qualify for Business Asset Disposal Relief, which used to be known as Entrepreneurs’ Relief. This brings the rate of CGT on disposals of certain business assets down to 10%. But only furnished holiday lets qualify – not rental properties.
The value of expert advice
CGT can be complicated for buy-to-let landlords, and you may end up paying more than you actually owe. You may benefit from seeking specialist tax advice.
St. James’s Place Partners can support you with personal financial advice; covering all areas of tax planning, pension planning and inheritance tax planning.
Find a Partner that’s local to you here. We have over 4,600 SJP Partners in the UK.
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