Landlord Capital Gains Tax Guide
Landlord capital gains tax is a tax levied on the profit made from selling a rental property that has appreciated in value.
The capital gains tax (CGT) payable on a rental property is only due when a landlord sells a property that has increased in value since the time of purchase.
CGT is calculated on the profit made through the sale not on the total sale price of the property.
When it comes to property investment and management landlords are often confronted with complex tax regulations.
As a landlord understanding the intricacies of capital gains tax can help you plan strategically to optimise profits and comply with the CGT regulations effectively.
What is the CGT allowance for landlords?
UK resident landlords will normally qualify for a capital gains tax allowance which is also know as the annual exempt amount (AEA).
It’s like the tax free personal allowance for income tax but only used for capital gains tax and let’s you receive a certain level of gain tax free.
The CGT annual exempt amount is worth £3,000 per tax year and isn’t transferrable to a future tax year if it’s not used.
Capital gains tax is only applicable if your total gains for the tax year exceed the yearly exemption limit.
The AEA applies to gains from all qualifying assets and not just from the sale of a rental property.
If your rental property is owned jointly both parties can use their own capital gains tax allowance against the same property.
What are the landlord CGT rates?
The capital gains tax rates for a property sold by a landlord are split into two bands which are dependent on the rate at which you pay income tax on your overall income.
If you are a basic rate taxpayer the CGT rate of 18% is applicable and if you are a higher rate taxpayer the rate of 24% is used.
18% CGT basic rate: For rental property capital gains and your total overall income falls within the basic rate tax band.
24% CGT higher rate: For rental property capital gains and your total overall income falls within the higher rate tax band or above.
If your usual tax bracket is at the basic rate but with the addition of your capital gain your taxable earnings end up in the higher rate tax band you may have to pay CGT at both these rates.
Residential property has different CGT rates to other types of asset. The rates used are normally set at either 10% or 20% so if you are selling something that is not residential property you should check which rate applies.
You can use our capital gains tax guide for more details on CGT rates for assests other than residential property.
How is landlord Capital Gains Tax calculated?
Let’s consider a scenario where a landlord purchases a property for £300,000 and later sells it for £375,000. The increase in value of £75,000 is the amount considered for CGT.
The tax free allowance (AEA) for CGT is £3,000. The remaining taxable profit therefore would be £72,000 (£75,000 – £3,000).
The example below is based on a landlord with an overall income of £55,000 + £72,000 (capital gain) = £130,000 and with a tax free personal allowance of £12,570.
Property sale
Value when you sold the property: £375,000
Minus the value of the property when you acquired it: £300,000
Total gain: £75,000
Total deductions
Capital cains tax annual exempt amount used: £3,000
Total taxable gain : £75,000
Minus deductions: £3,000
Taxable gain: £72,000
£72,000 taxable gain @ 24% CGT rate = £17,280
Total capital gains tax payable: £17,280
You can use the free HMRC working out your gain calculator for capital gains tax. It gives you an easy to understand breakdown of your capital gains tax liability from the information you enter.
Landlord Capital Gains Tax exemptions and reliefs
Residential landlords are able to become exempt from CGT or reduce their bill by using allowances and reliefs.
Careful planning is required to take full advantage of what HMRC makes available and to avoid potential pitfalls.
Multiple property owners:
If a property is owned by more than one person the tax free allowance is effectively multiplied by the number of owners.
Transferring a property into joint ownership before a sale can be beneficial, assuming the other owner hasn’t used their CGT exemption for the tax year.
For example if three landlords sell a jointly owned property at a profit of £8,000 no CGT will be due given that the CGT tax free allowance of £3,000 per person exceeds the total gain.
Private residence relief:
The amount of CGT may reduce if you have personally occupied the property at any point during your ownership.
Private residence relief only applies to landlords who initially live in the property before renting it out, as well as those who rent out a part of their dwelling while living in the rest.
Property improvement expenses:
The improvement expenses used for capital gains tax purposes are different to the standard rental property expenses claimed by a landlord on their tax return each year.
Some examples of expenses related to property improvement include a boiler replacement, a new roof or bathroom renovation.
The improvement must add value (and maintain some value until the sale of the property) and not just be a repair to something that needed fixed.
To be used to reduce your capital gains tax liability the improvement costs must not have been claimed through your self assessment tax return and be evidenced through purchase receipts.
Property transaction fees:
Fees associated with buying and selling a property, such as surveyor inspections, solicitors, mortgage brokers, and estate agents, can be deducted from CGT if they haven’t been claimed on the annual tax return.
Non resident landlord Capital Gains Tax
Starting from April 6 2015 capital gains tax was applied to direct disposals of UK residential properties made by non UK residents landlords.
This scope broadened on April 6 2019 encompassing all direct and indirect disposals of land and property in the UK.
UK landlords that are non resident are generally subject to capital gains tax on UK land or property but may not have to pay CGT on the entire gain.
If you sell a property during a temporary period of non residency in the UK you could still potentially face capital gains tax upon your return.
This circumstance might apply to those who choose to reside overseas for a short time or are stationed abroad for work purposes.
Capital Gains Tax rollover relief
Rollover Relief is available for furnished holiday lettings and certain trading assets. If a landlord reinvests all or some of the property sale proceeds they may defer the CGT by claiming rollover relief.
However this relief is generally unavailable for most residential landlords as buy to let (BTL) properties do not qualify.
Reporting and paying Capital Gains Tax
For UK residents the disposal of residential properties must be reported and CGT typically paid to HMRC within 60 days of the sale (date of completion not exchange of contracts).
For non UK residents the disposal of all properties must be reported, and CGT generally paid within the same 60 day period.
Capital Gains Tax for limited company landlords
Limited companies are subject to corporation tax and not capital gains tax.
Limited company landlords will need to pay corporation tax on the sale of a property with the profit taxed at a minium rate of 19%.
The first £50,000 profit will be taxed at 19% with profits over £50,000 up to £250,000 taxed on an increasing scale up to a maximum of 25%.
Do I need a landlord Capital Gains Tax Accountant?
Receiving guidance regarding capital gains tax from an accountant prior to selling, transferring or disposing of a property can lead to substantial tax benefits.
By assessing your CGT options a landlord accountant can ensure that any exemptions and relief measures are appropriately integrated and maximised when producing your capital gains tax calculations.
