Capital gains tax rules that landlords should know

Capital gains tax rules for property and landowners

Capital gains tax rules is a tricky subject to cover as the tax legislation gets updated every so often. Landlords and property investors may have to pay capital gains Tax on any profits made from selling (or “dispose of”) property that’s not considered main residency, for example:

  • inherited property
  • buy-to-let properties
  • land
  • business premises

The difference between what was paid for the property and the amount received when sold is your gain. Different rules apply if you; sell the home you live in, live abroad, or are a company registered abroad.

1. Private Residence Relief

You will be exempt from paying Capital Gains Tax when you sell your home if all of the following apply:

  • You own one property and it’s been your main residence since you purchased it
  • You have not let part of it out – this does not include having a single lodger
  • You have not rented part of the property out (excluding having a single lodger)
  • You have not used your property for business proposes
  • The grounds and buildings are less than 5,000 square metres in total
  • You did not buy it just to make a gain on the property

You may have to pay some Capital Gains Tax If you do not meet all the requirements mentioned above – married couples and civil partners can only count one property as a main residence.

If you qualify for Private Residence Relief and have a chargeable gain, you may also qualify for Letting Relief. This means you’ll pay less or no tax.

 

2. Letting Relief

If you’ve let out your home you may have to pay Capital Gains Tax – it may also be possible to claim letting relief if you qualify Private Residence Relief. You also get relief for the last 18 months you owned the property, even though you were not living in it. You’ll pay tax on your ‘chargeable gain’ (this is your gain minus any Private Residence Relief you’re eligible for)

Letting relief can reduce the capital gains tax owed on a property by up to £40,000 of tax-free gains, or £80,000 for a couple.

You can get the lowest of the following:

  • the same amount you got in Private Residence Relief
  • £40,000
  • the same amount as the chargeable gain you made from letting your home

 

Example

You make a gain of £120,000 when you sell your home, which you owned for 12 years. You lived in the whole property for 6 years, then you let it out in full for 6 years.

You get Private Residence Relief for the time you lived there (6 years). You also get relief for the last 18 months you owned the property, even though you were not living in it.

This means you get Private Residence Relief for 7.5 of the years (62.5% of the time) you owned the property.

You get Private Residence Relief on the same proportion (62.5%) of your gain. This means you will not pay tax on £75,000 of the gain.

The remaining 37.5% (£45,000) of the gain not covered by Private Residence Relief is your chargeable gain.

Because you made a chargeable gain of £45,000 while letting your property (and got £75,000 in Private Residence Relief) you can claim £40,000 in Letting Relief. This means you’ll pay Capital Gains Tax on £5,000.

Source: https://www.gov.uk/

If you’re a non-resident landlord and you’ve sold your property or land in the UK, you’re required to report the sell to HMRC within 30 days, even if you have no tax to pay.

 

3. Deductions

You can deduct the costs of buying, selling or improving your property from your gain This includes:

  • Stamp duty paid on the purchase of property
  • Estate agent fee
  • Solicitor fees
  • Improvement costs (such as extensions)
  • Qualifying buying and selling costs (such as surveyor fees)

In order to have a full understanding the capital gains tax rules its always recommended to get advice from a property tax specialist to make sure you’re paying the right amount. 

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