How capital gains tax affects buy-to-let

As a landlord, you’ll be looking to make a healthy profit when it comes to selling your buy-to-let property. However, there’s also capital gains tax (CGT) to consider. Here’s a look at how capital gains tax affects buy-to-let and what you can do to help reduce the amount of CGT you’ll need to pay. 

As a landlord, you’ll be looking to make a healthy profit when it comes to selling your buy-to-let property. However, there’s also capital gains tax (CGT) to consider. Here’s a look at how capital gains tax affects buy-to-let and what you can do to help reduce the amount of CGT you’ll need to pay. 

Emily Kindness
Business insurance expert
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Posted 10 JUNE 2022

How capital gains tax affects buy-to-let

If you’re a buy-to-let landlord, you’ll need to know about the implications of capital gains tax (CGT) when it’s time to sell your property.  
 
Buy-to-let properties are subject to 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. 

What is Capital Gains Tax?

Capital gains tax (CGT) is a tax on the profit you make when you sell a property or other asset that’s increased in value.  

CGT is only applied to the ‘profit’ you make, not the total value of your asset.  

You won’t need to pay CGT if you’re selling your main home, but you may be taxed on some or all of the profit you make when selling a buy-to-let property.  

However, you do have a capital gains tax-free allowance – currently £12,300 for 2022/2023 – so you only have to pay CGT if the profit you make is more than that.  

What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage for people who want to buy a property and rent it out, rather than live in it as their main home.  

Most buy-to-let mortgages are interest-only – which means your monthly repayments only pay off the interest, not the total amount owed on the mortgage. The balance is then paid off at the end of the mortgage term. This is something to consider on top of the potential CGT when it comes to selling up.  

Interest-only mortgages are popular with buy-to-let landlords as monthly repayments are typically lower than repayment mortgages. However, the initial deposit needed tends to be much larger than a residential mortgage – usually 25% of the property’s value, although some lenders will want as much as a 40% deposit.  Most lenders will also want to see an income of 25% to 30% above your monthly repayments as a condition of their mortgage offer.  

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 28%. 

Let’s take a simple example, assuming there are no other tax reliefs: 

If you buy a buy-to-let property for £150,000 and sell it a few years later for £200,000, your capital gain will be £50,000. Of this, £12,300 is tax free and £37,700 is taxable.  

  • If you’re a basic rate taxpayer, your CGT bill will be £6,786 (18% of £37,700). 
  • If you’re a higher rate taxpayer, your CGT bill will be £10,556 (28% of £37,700). 

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 £12,300, or you sell it for less than you bought it for, it’s hard to avoid CGT altogether.

That said, you may qualify for tax relief to help reduce the amount of CGT you’ll pay.

What are buy-to-let tax reliefs?

Private residence relief 

You may qualify for private residence relief if at any point you lived in the property and it was your only and main residence. 

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 £12,300 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.  

Can I reduce capital gains tax by setting up a limited company?

Recent changes in the buy-to-let market – notably, the 3% surcharge in Stamp Duty and a reduction in mortgage interest relief – 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 and sell their properties will pay Corporation Tax, which is currently set at 19%, when selling their properties. While it might not benefit basic rate taxpayers, a limited company set-up could be an attractive option for those in the higher rate tax band who are subject to 28% CGT.  

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 2022/2023 tax year. The amount of income tax you’ll pay depends on the tax band you fall into. For the 2022/2023 tax year, landlords will pay: 

  • 20% tax on buy-to-let income between £12,571 to £50,270 
  • 40% tax on buy-to-let income between £50,271 to £150,000 
  • 45% tax on buy-to-let income over £150,000. 

Stamp duty 
Stamp Duty Land Tax
is a one-off cost that’s paid in England and Wales when you buy a property. Landlords buying a rental property in addition to their main home will also pay a 3% surcharge. This means that current rates for buy-to-let investors in England and Northern Ireland are: 

  • 3% for properties up to £125,000
  • 5% on the property value between £125,001 and £250,000 
  • 8% on the property value between £250,001 and £925,000 
  • 13% on the property value between £925,001 and £1.5 million 
  • 15% on the property value over £1.5 million. 

Just remember, 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

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 HRMC helpline on 0300 200 3300 – Monday to Friday, 8am to 6pm.  

Frequently asked questions

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.

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