In the spring 2024 budget the chancellor announced a 4% reduction to the upper rate of capital gains tax if you sold your buy to let property. This tax reduction along with the current higher interest rates is making a lot of landlords consider selling up. In this article we take a look at the tax position and things to think about when selling your buy to let property.
What are the rates of Capital Gains Tax (CGT) if I sell my buy to let property?
The basic rate has remained at 18%, so if the profits of the sale plus your income for the year do need exceed £50,270 you will pay CGT at a rate of 18% on the profits. Any portion of the profits sitting above the £50,270 will from 6th April 2024 be taxed at 24%, a reduction of 4% from the previous higher rate.
What Capital Gains Tax reliefs are available when selling my buy to let property?
If you have not used your annual capital gains tax allowance elsewhere, then you will have £3,000 (the rate for 2024/25) tax free from the profits. For 2023/24 this allowance was £6,000.
If you have ever lived in the property personally and had it as your main residence then you will be able to claim Private Residence Relief (PRR). This means that the portion of the profits relevant to the period you lived in the property will be CGT free, and in addition to the actual time you lived in the property you are able to add on the final 9 months of ownership as additional PRR (this 9 months is increased to 36 months for people with a disability).
If when letting out the property you were in shared occupancy with the tenant(s) then you can claim Letting Relief. The amount of the relief will be the lower of:
- The gain you receive from the proportion of the property let, or
- The amount of Private Residence Relief (PRR) you can claim, or
- £40,000
How do I work out the profit from selling the property?
From the sales price you will be able to deduct:
- The initial cost of the property
- Any monies spent on capital improvements during ownership
- The costs of selling the property (agents fees etc)
- The costs incurred buying the property (stamp duty, legal fees etc)
When do I report and pay the Capital Gains Tax?
Since 27 October 2021 you must report the sale to HMRC and pay any Capital Gains Tax due within 60 days of completion. You submit what is called a “residential property return” (activated via your personal Gateway), which reports the profit and the CGT calculation. The payment of the CGT must also be paid within the 60 day time limit.
You will still report the disposal on your self-assessment tax return for the year, along with any other disposals you make in the year, but will get relief for the CGT already paid.
Example
Susan has owned a property for 20 years but has decided to sell. She is single, and purchased the property for £200,000. She has recently sold the property for £325,000, and during her ownership she put an extension on the property costing £18,000, her costs of purchase were £5,000 and her selling costs are £2,000. This gives her a profit of £100,000. During the 20 years of ownership Susan:
- Lived in the property as her private residence for 12 years (144 months)
- She used it as a second home for 4 years (48 months)
- She let out a section of the property to a tenant for 4 years up to the point of sale, while she was also living at the property. The section let out equated to 25% of the total property
Susan’s profits subject to Capital Gains Tax are calculated as follows:
| Profit from Susan’s sale | £100,000 |
| Private Residence Relief | |
| 144 months + the final 9 months of ownership. Equals 153 months out of the total ownership of 240 months | (£63,750) (being £100,000 x 153/240) |
| Letting Relief | |
| 39 months – being the 28 months when the property was let, less the final 9 months of ownership claimed under PRR | (£4,062.50) (being £100,000 x the portion let of 25% = £25,000, then this £25,000 x 39 months / 240 months) |
| Profit minus reliefs | £32,187.50 |
| CGT alowance for 2024/25 | (£3,000) |
| Taxable gain | £29,187.50 |
The amount of capital gains tax Susan will pay will depend on her income. If her annual income was £20,000 and she had no other gains, then her total for the year is £49,187.50 and so the whole gain would be taxed at 18% (£5,253.75). If her annual income was £60,000 with no other gains, then her total for the year is £89,187.50 and so the whole gain would be taxed at 24% (£7,005).
If you have a buy to let property and are considering selling, why not have a free consultation with Veritons to get an idea of the likely Capital Gains Tax you will incur? To book your consultation hit the button below and complete our contact form and we will be in touch very soon to arrange.