The Property Owner’s Guide To Capital Gains Tax
2022 introduced capital gains tax changes for landlords that changed the deadlines for reporting and paying capital gains tax on the profits of additional properties. This means landlords now get sixty days to report and pay their capital-gains-tax bill rather than thirty days when selling a buy-to-let property.
Many landlords got caught up in capital gains tax issues in previous years when selling a rental property, so the Government introduced changes aimed at helping buy-to-let landlords reducing their portfolios to make navigating the sales of their properties much smoother.
Whether you are a landlord letting out just one residential property or have a portfolio of properties you have invested in, it still makes sense to protect yourself with landlord insurance.
Landlord insurance can be invaluable for buy-to-let property owners, especially for covering financial losses for a loss of rental income should a property experience a fire or flood event or suffer damaging storm damage, which leaves the property unliveable for your tenants.
But apart from protecting yourself with landlord insurance, you need to understand how capital gains tax works to ensure you are not left struggling financially when it comes time to sell a property.
What is capital gains tax (CGT)
Capital Gains Tax is the tax due to HMRC when you sell an investment property that has increased in value since you purchased it. Most landlords will invest in buy-to-let property to generate profit from rental income through letting out the property. Still, house price growth over time will almost certainly generate a profit once they decide to sell the property.
Capital gains tax rules differ if you are a landlord versus a person who owns a property and lives in it. A live-in homeowner isn’t ordinarily subject to paying capital gains tax. Landlords pay tax on the amount of increased value on a property asset once sold, but not on the total amount of money the property sold for.
When does capital gains tax apply?
Capital gains tax applies to landlords when they sell a buy-to-let property that has increased in value since its purchase. CGT is calculated on the profit made rather than the selling price of the property. But CGT doesn’t apply to every property sale.
When you are selling your main home (your primary residence where you live), you will be eligible for Private Residence Relief providing:
- The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
- You did not buy it to make a gain
- You have not let part of it out – this does not include having a lodger
- You have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
- You have one house, and you’ve lived in it as your main home for all the time you’ve owned it
But if you are selling a second home, this will result in CGT being applied to any financial gain you make on the sale above your capital gains tax allowance. As with second homes, if you are a landlord planning to sell a buy-to-let property, it will usually mean you will get a capital gains tax bill calculated on the increase in value.
Capital gains tax on inherited property is a little different. No CGT will be due until you sell the property as long as any inheritance tax due on the estate has been paid. When you inherit a property, it will have a valuation at current market rates, and any profit on the sale you make above this valuation when you come to sell will be subject to CGT.
What exemptions are there from capital gains tax?
While CGT applies when you sell or dispose of an asset and make a profit or ‘gain’ from it, some financial gains are not subject to or are exempt from CGT, for example:
- Assets held in ISAs
- Foreign currency held for your own use
- Gifts to UK-registered charities
- Personal belongings (or ‘chattels’) where the sale proceeds (or value when given away) are less than £6,000
- Private motor cars, including vintage cars
- Prizes and betting winnings
- Some government securities
How do you calculate capital gains tax?
Capital gains tax is pretty straightforward to calculate when you sell your property. For example, you purchase a buy-to-let property for £200,000 and rent it out for a few years to benefit from a good rental yield.
After a few years, you sell the property for £250,000, thus making £50,000 profit on your original investment. This £50,000 will be subject to capital gains tax. You only pay capital gains tax on financial gains above your tax-free allowance, which is currently £12,300 at the time of writing in 2022.
This means that you would pay tax on £50,000 minus your tax-free allowance of £12,300, leaving you with a provisional capital gain of £37,700. The amount of tax you pay on your capital gain will depend on whether you pay higher rate income tax or basic rate income tax.
If you’re a higher or additional rate taxpayer, you will pay the following:
- 28% on your gains from residential property
- 20% on your gains from other chargeable assets
If you are a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.
You will need to determine how much taxable income you have (income minus personal allowance) and any other income tax reliefs you are entitled to. Once you know your total taxable gains amount, deduct your tax-free allowance. Add this amount to your taxable income.
If this amount falls within the basic Income Tax band, you will pay 10% on your gains (or 18% on residential property). You will pay 20% (or 28% on residential property) on any amount above the basic tax rate.
Landlords now have a little more breathing space with the changes in capital gains tax reporting and tax payments from 30 to 60 days after the completion of the property sale. However, penalties still apply to late capital gains tax returns, so it pays new landlords to thoroughly read up on and understand their tax obligations regarding capital gains.
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