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How does Capital Gains Tax affect buy to let properties?

Discover how to reduce your CT tax and save thousands…

Are buy to lets still classed as a sound investment?

Over the period of property ownership, landlords may have to deal with several tax liabilities including capital gains on buy to let properties.    

So, to begin with, why invest in a buy to let?

The decision to invest in a property for rental  and property tax purposes can result in financial gains of an attractive nature, it can however, make your tax affairs more complicated.

Generally, to ensure the highest returns, buy to let properties are classed as investments of a medium to long term period.  Usually, capital gains tax is generated on a buy to let property when the point of disposal is reached, either by a transfer to a company or to another party. 

As a result of recent UK tax rule changes that could affect buy to let properties, such as high earners being unable to offset mortgage relief, many landlords are using a limited company to transfer in the ownership of their rental properties, in a bid to lower the magnified tax problems associated with owning a rental property. 

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However, by transferring into a company, even with the obtainability of eligible reliefs, potentially a capital gains tax could be levied between the difference on the original price that the property was purchased for and the current value.   As a result of this other tax implications could be triggered. 

So, you’re probably thinking ‘how do I know if I have to pay capital gains tax on a buy to let property’?

Basically, the trigger for capital gains tax with regard to a buy to let property, is on the sale, whereby the price of sale is higher than what the original purchase price was, minus allowable costings, such as:

  • Stamp duty costs
  • Any Solicitor’s fees
  • All estate agent fees
  • Advertising costs (regarding the sale of the property)
  • Any costs resulting from improving the property to increase value
  • Losses on past buy to let properties that have sold in previous years

As from April 2015, UK resident and non-resident property owners were subject to CGT and the jurisdictional general basic limit for the purposes of CGT, excluding non-residents regarding UK residential property was expanded.  This means that if a vendor who is a non-resident is selling a UK residential property, then UK CGT will be applicable - only however, on share of a gain, arising from 6 April 2015.

Don’t forget that…

Properties held before this time, will have to have the gain sliced and diced both before and after the date. 

What else does Capital Gains Tax apply to?

Aside from buy to let properties, any property not deemed as the owners ‘main residence’ is subject to capital gains tax, this could include holiday lets and second homes

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Properties that are nominated as an owner’s main residence are eligible for CGT exemption as a result of the Private Residence Relief scheme. As a result of this, an individual cannot claim relief on any capital losses arising from the main residence, which would be applicable on an investment property sale.

So, how will these recent changes in rules affect buy to let owners?

Capital gains tax tariffs for profits resulting from assets including stocks and shares were decreased in April 2016, as shown below:

  • From 18% to 10% for tax payers at the basic rate
  • From 28% to 20% for tax payers at a higher rate

However, these CGT reductions were not applicable to chargeable gains resulting from the sale of a residential property, not qualifying for private residence relief. 

Therefore, buy to let property CGT rates remain at a high level, with landlords seemingly being penalised by an 8% charge on profits. This equates to:

  • 18% for tax payers at the basic rate
  • 28% for tax payers at a higher rate

Before a capital gains tax charge is incurred, every taxpayer has a yearly capital gains tax-free allowance that is able to be used each tax year.

Currently, the CGT annual exemption rate is set as below:

  • £11,300 - 2017/18

Furthermore…

Following the property sale, minus the above expenses outlined above, one is then able to remove from the profit, subject to the yearly limit, the CGT exemption.

Each property owner can claim an exemption of CGT, not exceeding the annual limit.

Quite simply…

Most cases are not this straightforward, with the complexities of added reliefs and liabilities to consider.  The safest method in ensuring a tax-efficient approach regarding the transaction is to seek professional advice. 

Now for the best bit, how to reduce capital gains tax on a buy to let property…

It is always worth checking out if, when selling a buy to let property, the capital gains tax liability is able to be reduced or deferred.

But, what about Private Residence Relief?

CGT exemption is applicable to private residences.  If you are planning to sell your buy to let and have lived in it, then it may be possible to make use of the private residence relief.

If, throughout the ownership period of the property, there is evidence proving that it was used as a main residence by the individual, then it could be possible to claim relief on the last eighteen months, based on ownership being exempt from CGT.

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In order to be able to apply for this, proof will need to be provided that the property either has or is been the main residence.  This could be via Council tax records, utility bills, doctor’s bills or the voting register.

Listen, there’s more….what about private letting relief?

As well as private residence relief there is also ‘letting relief’. 

To qualify for letting relief, you must be eligible for private residence relief and either all or part of the property must of at some time during your proprietorship been leased as a residential property with a chargeable gain resulting from the letting.

With regard to letting relief, the lower amount of the private residence relief that is available in respect of the letting is able to be claimed, or £40,000 or the gain amount resulting from the letting.

As before, each individual property owner is eligible for the relief.

To cut a long story short… what are the changes to Capital Gains Tax on a buy to let property?

There are changes scheduled for 2019 regarding the payment requirements and reporting for buy to let property owners

At presents, as is the case with income tax, gains are declared on Self-Assessment tax returns.

The date that capital gains tax is due is 31st January, following the tax year that the gain was made (i.e.: when the property was sold)

Finally,

However, it must be noted that from April 2019, following the sale of a property, all due capital gains tax must be both reported and paid within 30 days (after the disposal).

These changes will not affect properties that currently enjoy private residence relief on the capital gains.

So, will these changes be enough to stabilise and grow the buy-to-let market?

Sarah Aubert