Capital Gains Tax (CGT) is a tax that you pay on a portion of profit (or capital gain) on the sale of certain chargeable assets, including any property that is not your main residence. This includes property that you own and rent out to tenants. Want to find out more? Read on for a quick rundown on what, as a property investor, you need to know.
The types of properties where capital gains tax is paid include:
- Buy-to-let properties
- Second home
- Plots of land
- Inherited properties
- Business premises
When is Capital Gains Tax Payable On Rental Property?
Capital Gains Tax is payable on a property from the moment it is sold, however it does not have to be paid officially until the 31st January of the following tax year. The amount of Capital Gains Tax payable on a rental property will depend on two factors. First, the profit that has been made when you sell the property and secondly, the rates at which your property is charged CGT.
Capital Gains Tax is worked out by HMRC using the personal income of the seller, adding your taxable gains to your income to see which Income Tax band you fall into for the year in which your property has been sold. You must therefore work out to calculate Capital Gains Tax on rental property:
- Your total taxable gain from this investment
- The taxable gain minus any expenses and CGT allowance
- Your tax threshold and rate at which you’ll pay CGT
Can I Deduct Expenses?
There are certain costs that you can deduct from taxable gains that will reduce the amount of Capital Gains Tax you pay on your property. This includes the Stamp Duty Land Tax that you paid when buying the property, any estate agents’ and solicitors’ fees, any additional buying and selling costs (such as the cost of a surveyor), and any improvement costs to the property (such as an extension, kitchen and bathroom renovation etc.) You cannot deduct the cost of any maintenance for the property or the interest on your mortgage.
Is There a Tax Allowance on Property?
The Capital Gains Tax allowance on property for 2019-2020 has been set at £12,000, meaning that no CGT is payable on the first £12,000 of profit on the sale of a property. If your taxable gains are below this threshold of £12,000 you do not have to inform HMRC of the figure.
How Do I Work Out my Capital Gains Tax Rate?
HMRC use your Income Tax band to determine the rates you’ll pay CGT on a property sold, adding your taxable gains to your income.
Capital Gains Tax rates on property for 2019-2020 are:
- Up to £12,000 = 0%
- £12,001 - £50,000 = 18%
- £50,001 and above = 28%
Income Tax Band rates for 2019-2020:
- Personal Allowance up to £12,500 = 0% Income Tax
- Basic Rate of £12,501 - £50,000 = 20% Income Tax
- Higher Rate of £50,001 - £150,000 = 40% Income Tax
- Additional Rate of £150,001 and above = 45% Income Tax
Is There Any Tax Relief?
Letting relief is available to landlords selling property under the following criteria:
- The property has been let out as residential accommodation at some point during your ownership
- You live at the property at the point of sale, sharing occupancy with your tenant
Letting relief can help reduce Capital Gains Tax on a property by up to £40,000 of tax-free gains. You will receive the lowest of the following:
- The same as the amount of Private Residence Relief you are entitled to, £40,000
- Or, the chargeable gain made from the period when the property was rented out
How to Pay Capital Gains Tax
Once you have worked out your taxable gains you need to report them to HMRC if above the threshold, either through the ‘real time’ CGT service, or in your annual Self Assessment tax return.
If you would like to know more about the tax implications of running a rental property, please feel free to speak to the Residential Estates team on 01244 343 355 or firstname.lastname@example.org. We are here to support you every step of the way towards financial freedom through property investment.