Investors looking to make a profit are drawn to the current strong real estate market. Before getting started, landlords must understand how Capital Gains Tax (CGT) would affect their real estate transactions. There are ways to lower the CGT payment even if it is based on the price differential between the buying and selling prices. This article discusses all you need to know about CGT on buy-to-let, so let’s get started!

What is Capital Gains Tax?

Capital gains tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. The amount of tax owed is calculated based on the price you paid for the asset (the ‘base cost’) and the price you sold it for. Some assets, such as your main home, are exempt from CGT. However, if you sell a rental property that has increased in value since you bought it, you may be liable to pay CGT on some or all of the profit.

What is the Capital Gains Tax Rate on Buy-to-let Property?

The rate of CGT that a landlord must pay on the sale of a buy-to-let property is determined by their taxable income. Basic rate taxpayers earning £50,000 or less will pay a CGT rate of 18%, while higher rate taxpayers earning £50,000  or more will pay a rate of 28%.

To illustrate, if a landlord purchased a rental property for £100,000 a decade ago and sold it today for £150,000, their capital gain would be £50,000, of which £37,700 would be taxable after the CGT allowance is taken into account. Assuming no other tax reliefs, the resulting CGT bill would be £6,786 for basic-rate taxpayers or £10,556 for higher-rate taxpayers. The benefit of CGT is that it is taxed separately from other income, which means that a landlord’s tax bracket for their other income will remain unchanged.

Why do you pay capital gains tax on Buy-to-let?

You pay capital gains tax on Buy-to-let because it is considered a type of investment. When you sell or dispose of an asset that has increased in value, such as a rental property, you make a profit which is known as a capital gain. Capital gains tax is charged on this profit. The rationale behind this tax is to ensure that individuals who make a profit from investments, including rental properties, contribute their fair share to the overall tax revenue of the country.

Who Pays the Capital Gains Tax on Buy-to-let?

The owner of the buy-to-let property who sells it or otherwise disposes of it and makes a profit is liable for paying capital gains tax on that gain. This implies that rather than the tenant who is renting the property, the landlord who sells the rental property is the one who must pay the capital gains tax.

When is the Capital Gains Tax Paid on Buy-to-let?

As the owner of a buy-to-let property, you may be required to pay capital gains tax (CGT) on any profits you make when you sell it. If you sold a rental property between 6th April 2022, and 27th October, 2023, and are required to pay CGT, you have 30 days from the completion date to notify HMRC and make a payment. If the sale was completed after this date, you must make the payment within 60 days. Failing to report the sale and pay the tax on time may result in penalty fees and interest charges.

You can make the payment online through the Government Gateway using a user ID and password. If you do not have these, you can create an account when you report and pay. If you usually complete a self-assessment tax return, you will also need to provide details of any capital gains you have made at the end of the relevant tax year.

What Are the Buy-to-let Capital Gains Tax Reliefs?

Several buy-to-let capital gains tax reliefs available can help reduce the amount of tax you pay. Here are a few:

• Capital gains tax allowance: Every individual has an annual CGT allowance, which is currently £12,300 (as of tax year 2022/23). This means that you can make a profit of up to this amount on the sale of an asset, including a buy-to-let property, without having to pay any CGT.
• Private residence relief: If the buy-to-let property was your main residence at any point during your ownership, you may be able to claim Private Residence Relief (PRR). PRR can reduce or eliminate the amount of CGT you owe. The relief you get depends on how long you lived in the property as your main home.
• Letting relief: If the property was once your main residence but you let it out before selling, you may be able to claim to let relief. This relief can reduce the CGT bill by up to £40,000 per owner. The relief you get depends on how long you lived in the property as your main home and how long you rented it out.
• Gift relief: If you gift the property to your spouse or civil partner, you can transfer ownership without incurring any CGT. However, if you gift it to anyone else, you may still have to pay CGT on the transfer.
• Incorporation relief: If you hold the buy-to-let property as an individual, you may be able to transfer it to a limited company without incurring CGT. This is known as incorporation relief. However, transferring a property to a company may trigger other tax implications, such as stamp duty and corporation tax.

Conclusion

Landlords need to understand the implications of Capital Gains Tax (CGT) on buy-to-let property transactions, as it can significantly affect their profits. CGT is calculated based on the difference between the purchase and sale price of an asset, and buy-to-let properties are considered investments subject to CGT. The rate of CGT that landlords pay depends on their taxable income.

However, there are several CGT reliefs available that can help reduce the amount of tax owed. It is essential to understand these reliefs and their eligibility criteria to lower the CGT payment. So, landlords must report and pay CGT on time to avoid penalty fees and interest charges.