One of the most important and significant taxes that landlords pay on their Buy to Let properties is Capital Gains Tax (CGT).This tax becomes payable when the landlord sells a property, so is not required to be paid whilst the landlord is renting the property out and will be a one-off fee at the end of the sales process.
What is capital gains tax?
Capital gains tax works out as a percentage of the difference between the amount that you, as a property owner, paid for the property, and how much you were able to sell it for. There are some deductions and exemptions which are taken into account as well, but for the most part this is what the tax refers to.
As an example, if you buy a property for £200,000 and, 10 years later, sell it on for £250,000 your capital gains liability will be worked out from the £50,000 profit from the sale of the property. The amount you will actually pay out of this varies according to a variety of factors.
How to work out CGT
Before you can work out how much CGT you will pay, you first need to know what the annual exempt amount is. You are only required to pay CGT above your tax-free allowance, which in 2019/20 is £12,000. You then deduct £12,000 from your overall capital gain, and the rest of the capital will be taxed depending upon your total taxable income for the year. The rates are:
- Basic rate band – 18%
- Higher rate band – 28%
These rates are notably higher than they are for other types of assets, which is a measure brought in by the UK government to reduce the number of investors active in the residential property market.
It is not necessary for you to work out and declare your capital gains tax on your own. HMRC provides a handy tax calculator on their website, to help you to work out how much CGT you are liable for. This calculation is worked out by taking the price you paid for the property from the current market value, and subtracting your annual exemption and any other costs.
For landlords who have not incorporated into a LTD company, then the CGT paid also depends on your non property disposal related income for the particular tax year.
As an example, let’s consider someone who bought a house 12 years ago for £100,000 and sold it after 6th April of this year (2019) for £200,000. Before any profits made from property disposal(s) their salary for the year is £22,500.
Throughout their ownership, they have accrued £20,000 of capital spending which they can deduct from the gross profit of the sale. For sake of argument we could say this was £10,000 on improvements, and a further £10,000 which consists of all the legal and other fees and taxes related to the initial purchase and subsequent sale of the property.
- Gross gain is £200,000 minus £100,000, which is £100,000
- Net gain is the gross gain (£100,000) minus allowable expenses (£20,000), which is £80,000
- Taxable gain is the net gain (£80,000) minus the CGT allowance (£12,000) is applied, which is £68,000
- The first £27,500 of the taxable gain is charged at 18% (£50,000-£22,500). The tax payable is 18% of this, which is £4,950
- The amount of that gain liable for higher rate CGT is the remaining gain of £40,500 (£68,000 – £27,500). The tax payable is 28% of this, which is £11,340
- Combining these two amounts is the total CGT payable, which is £16,290
If you are selling a property that you have lived in at some point, acquired the property via inheritance, or are running your letting enterprise as a Limited company, then the above example does not apply.
We will be posting articles about these scenarios in the future, but if you need help on these issues now, then please get in touch.
How can you reduce your CGT liability?
There are a few costs and reliefs that will be taken into account when working out your CGT liability, whether you use the HMRC calculator or work out the amount on your own. For instance:
- The cost of major home improvement works. This would include extensions, remodelling entire rooms or building a conservatory. However, you may not include the costs of standard maintenance and repair as these would be included in your self-assessment tax return as a buy to let landlord.
- The costs of acquisition and disposal (i.e buying and selling), This would include any estate agent or solicitors’ fees, and even stamp duty.
- Private Residence Relief and Letting Relief (although there are big changes to this from 2020)
There are also a couple of capital gains tax reliefs which you might be entitled to on your self assessment tax return, such as use of the EIS scheme, but this will be covered in the future as this is beyond the scope of this basic feature.
How to declare your CGT
There are a couple of options for those who wish to declare and pay their capital gains tax on the final sale of their property.
- You can report and pay your CGT straight away using the ‘real time’ Capital Gains Service, or
- You can wait and report your CGT liability in your self-assessment tax return.
If you are a non-resident who has sold property in the UK, you need to report this to HMRC within 30 days whether or not you actually have any CGT liability.
Using the Real Time Capital Gains Service
If you decide to report and pay your tax right away, you can use the ‘real time service’. You are only able to use this service if you are a UK resident and have a Government Gateway user ID and password, which you can get from HMRC.
You need to work out what your capital gains tax liability is before you can use the service, and use the Report Capital Gains Tax online service to declare it. You can upload PDF or JPG files to show your calculations and allow HMRC to ensure that everything is correct. HMRC will then send you a payment reference number which you can use straight away to pay your tax via:
- Cheque
- Faster Payments
- CHAPS
- Bacs
How to report in a self-assessment tax return
If you usually file a self-assessment tax return as a landlord then you can use this to report your capital gains liability in the tax year after you sell your property. You are also able to file a self-assessment tax return even if you don’t usually, by registering for self-assessment in the year after you sell your property.
Remember that the online filing deadline is the 31st January in the year after the tax year. For property sold up to the 5th April 2019, this will be 31st January 2020.
Talk to us
The residential letting sector has been under attack for some time by politicians as they seek to apportion blame for the housing price increases. Despite this attack being unfounded and easily disproved, landlords up and down the country are shouldering the blame in terms of inflated taxation rates.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
RITA Recommends:
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.