How capital gains tax affects buy-to-let
Buy-to-let properties are subject to capital gains tax (CGT) on the profit – or capital gain – you make when the property is sold. In other words, if you sell your property for more than you bought it.
However, you do have a capital gains tax-free allowance – £3,000 for 2024/25 – so you only have to pay CGT if the profit you make is more than that.
How much is capital gains tax on a buy-to-let property?
The CGT rate you’ll be charged on a buy-to-let property depends on which tax band you fall into.
If you’re a basic rate taxpayer with an income of £50,270 or less, the CGT rate is 18%.
If you’re a higher rate taxpayer with an income over £50,270, the CGT rate is 24%.
Just be aware that if you’re a basic rate taxpayer, the capital gain will be counted as part of your income so it might push you into the higher rate tax band.
Can I avoid capital gains tax on a buy-to-let property?
Unless the capital gain on your buy-to-let property is less than £3,000, or you sell it for less than you bought it, it’s hard to avoid CGT altogether.
That said, you can deduct certain costs from your tax bill. You may also qualify for tax relief to help reduce the amount of CGT you’ll pay.
What are buy-to-let tax reliefs?
Private residence relief
If the property was your only and main residence for a period of time, you may be able to claim private residence relief.
Let’s say you bought a house 10 years ago and lived in it as your main home for the first five years before renting it out. When it’s time to sell up, you may not need to pay CGT for:
The years you lived in the home
The last nine months you owned the home – even if you were no longer living there.
Letting relief
You might qualify for letting relief on the gains you make when you sell the property, but only if you lived in the house at the same time as your tenants.
Just be aware that you can’t apply for these types of tax relief if you took out a buy-to-let mortgage and never lived in your rental property.
How else can I reduce capital gains tax on a buy-to-let?
As well as your £3,000 personal CGT allowance, you’ll also be able to deduct costs involved with buying, selling or improving your property for capital gain.
These include:
Estate agents’ and solicitors’ fees
Stamp duty
Improvement works to increase the value – for example, an extension.
You won’t be able to deduct general maintenance costs, like decorating, boiler servicing or the day-to-day upkeep of your rental property.
How is capital gains tax calculated on a buy-to-let?
Follow these steps to calculate the amount of capital gains tax you owe on the sale of your buy-to-let property:
Start by establishing your income tax band by adding up your total taxable earnings.
Deduct the property sale price from the amount you paid for it.
Take off any allowable costs and expenses.
Deduct your capital gains tax allowance.
If you’re a basic rate taxpayer, add your gain to your income. You’ll pay 18% on the amount below £50,270 and 24% on anything above.
If your income already makes you a higher or additional rate taxpayer, your whole gain will be taxed at 24%.
Example of selling a buy-to-let
We’ve laid out some example costings to give you a better idea of how CGT is calculated on the sale of a second home:
Your total taxable income = £25,000 (basic rate taxpayer)
Property bought for £120,000
Property sold for £220,000
Your taxable gains from selling the property = £100,000
Allowable fees of £5,000 deducted = £95,000
Your tax-free allowance of £3,000 is deducted from your gains of £95,000
That leaves you with tax owed on £92,000
Taking your £25,000 income from the £50,270 basic rate threshold leaves £25,270 to be taxed at 18 (£4,549). The remaining £66,730 is taxed at the higher CGT rate of 24% (£16,015)
Your total CGT bill = £20,564
You can also use the Government’s capital gains tax on property calculator to help you work out how much you owe.
Can I reduce capital gains tax by setting up a limited company?
Recent changes to the taxation system – notably the reduction in the capital gains tax allowance – mean that landlords are now looking for other ways to reduce their tax burden.
Buy-to-let landlords who set up a limited company to manage their properties will pay corporation tax on profits made from selling them. This is currently set at 19% for profits under £50,000 (or 25% for profits over £250,000).
A limited company could be an attractive option for landlords in the higher rate tax band who are subject to 24% CGT. But selling a buy-to-let home as an individual can be simpler. As a company director, you’ll only be able to access the property sale proceeds via dividends, which are also taxed.
There are pros and cons to managing your property portfolio as a company, so it’s crucial to get expert advice before going down this road.
What other taxes are tied to buy-to-let mortgages?
While CGT applies to the gains you make on selling your rental property, as a landlord there are other taxes you’ll need to consider:
Income tax
You’ll be charged income tax on rental income above your personal allowance – currently £12,570 for the 2024/25 tax year. The amount of income tax you’ll pay depends on the tax band you fall into. For the 2024/25 tax year, landlords will pay:
0% tax on buy-to-let income between £0 and £12,570
20% tax on buy-to-let income between £12,571 and £50,270
40% tax on buy-to-let income between £50,271 and £125,140
45% tax on buy-to-let income over £125,140.
Stamp duty
Stamp Duty Land Tax (SDLT) is a one-off cost that’s paid in England and Northern Ireland when you buy a property. Landlords buying a rental property in addition to their main home will also pay a 5% surcharge.
Scotland and Wales have their own versions of stamp duty.
Current rates for buy-to-let investors in England and Northern Ireland who already own another property are:
5% for properties up to £250,000
10% on the property value between £250,001 and £925,000
15% on the property value between £925,001 and £1.5 million
17% on the remaining property value over £1.5 million.
You can offset stamp duty costs against your capital gains tax bill when you sell the rental property.
To see what stamp duty you’d have to pay in England, Northern Ireland, Wales or Scotland, use our stamp duty calculator.
If you’re buying six or more properties on or after 1 June 2024, the non-residential rates of SDLT (not the higher rates) apply.
How do I pay capital gains tax on a buy-to-let property?
You’ll need to report your capital gains and pay the tax using the Government’s capital gains tax on UK property account. This needs to be done within 60 days of the completion date. To use this service, you’ll need a Government Gateway user ID and password. For general enquiries about capital gains tax, you can call the HMRC helpline on 0300 200 3300, Monday to Friday: 8am to 6pm.
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FAQs
Will I need to pay capital gains tax if I remortgage my buy-to-let property?
No, you won’t have to pay CGT if you’re remortgaging your buy-to-let property. The tax only applies to the gains you make when you eventually sell the property.
Can I name my buy-to-let as my main residence?
If you have a rental property that’s sitting empty, you might consider changing it to your main residence simply by moving in yourself. It’s a process called ‘property flipping’.
However, you must be honest about your change of address. The property named as your main residence must genuinely be your main home. You’ll need to show proof: your name and main address must be shown on documents including bills, bank statements, the electoral register and your self-assessment tax account as evidence.
Be aware that if you’re a married couple or civil partners, you can only name one main residence between you.
What’s the best way to reduce CGT on a buy-to-let property?
If you’re taking out a buy-to-let mortgage to buy a rental property, it’s very unlikely that you’ll be able to avoid CGT if you make a healthy profit from its eventual sale.
However, many buy-to-let landlords could end up paying more CGT than necessary. The best way to reduce your bill is to get a good accountant or financial advisor on board. They should be able to advise you on ways to reduce your CGT while staying within the law.
With almost 15 years’ experience in the insurance industry, Mubina is an expert from one end to the other. From leading the introduction of new products, marketing them, innovating them, all the way to handling claims with customers. At some point in her career, she’s done it all.
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