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How To Minimise Capital Gains Tax When Selling Your Buy-to-Let

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Property prices are continuing to soar and people are happier than ever to invest in residential bricks and mortar. This has left many buy-to-let investors in a position where their property may be worth significantly more than it was just a year ago. And for some, that presents a very good reason to at least look into the possibility of selling their buy-to-let property.

Of course, in reality there are many reasons that owners of rental properties might decide to sell. An unexpected bill that needs paying, a loss of interest in acting as a landlord, or simply to fund a different investment. Yet, in all of these cases there is likely to be a common goal; to make as much money from the sale as possible.

However, when you make that sale on a property that is not your only one, you will likely be faced with a capital gains tax bill. Here, we take a look at what you can do to minimise the cost of your capital gains tax when you sell your buy-to-let property.

How does capital gains tax work on properties?

The first thing to note is how capital gains tax generally works. If you own one home, live in it and then sell it, you will not have to pay capital gains tax. However, if you have a second property or a buy-to-let home you will have to pay a rate of capital gains tax.

The exact rate of tax depends, but capital gains tax on property is higher than on other assets. As a standard, basic-rate taxpayers will pay 18% on the gains they make when they sell. Higher and additional-rate taxpayers will pay 28%. Whereas, on other assets, the basic rate is 10% and the higher-rate is 20%.

It should be noted that all taxpayers do have an annual allowance on their capital gains tax, meaning a certain amount is tax-free. The figure through to 2023 is £12,300. And couples who jointly own an asset can combine this amount.

How much will my capital gains tax be?

In general, you only need to pay capital gains tax on the profit made from the sale of the property. As such, to work out the kind of capital gains tax bill you are going to face you need to first consider what your gain is by deducting the amount that you originally paid for the property from the price you are selling for.

Of course with rising property prices, this can mean that your capital gains tax bill could be significant. Thankfully, however, there are some techniques that can be used to minimise your bill.

How to keep your capital gains tax as low as possible

There are a number of ways that you can minimise your capital gains tax through legitimate means.

  • Get the timing right – if you have already used some or all of your capital gains allowance this year, it could be worth putting off the sale until next year. This way you can use your full capital gains tax allowance on the property sale.
  • Deduct costs – there are certain costs that you can deduct from the sale when you work out your tax bill. For example, costs such as those involved in improving the property such as a loft conversion can be taken into account. However, you cannot deduct the costs involved in the general upkeep of the property.
  • Letting relief – this could be an interesting option if you have ever lived in the property that you are selling. Letting relief is not available if you are a buy-to-let investor who has never lived in the property. In essence, the profit on the property is divided between the number of months that the property has been owned. With lettings relief, sellers don’t have to pay tax on the number of months that they were living in the property.

What if you are selling within the family?

One interesting point that should be raised comes into effect if you are either selling or transferring a buy-to-let property to a family member. There are many reasons that you might wish to do this. And in the majority of cases, capital gains tax will need to be paid on the transaction or transfer as normal. However, there is an exception to this rule.

“It is the case that capital gains tax is not usually paid when assets are transferred between spouses,” explains Simon Odam, Director at Wellden Turnbull, a chartered accountants with extensive experience in capital gains tax. “This means that you may well be able to reduce your tax liability by moving some of your assets into the name of your spouse – this could allow you to make use of a lower tax band.”

If you are looking to sell your buy-to-let property for tax reasons, this could be an interesting option for you to consider.

Is it the right time for you to remortgage?

Instead of paying taxes on the sale of your property or selling your buy-to-let to raise money to finance a new investment, you might want to consider re-mortgaging your property. While the housing market might be booming at the moment, it could be the right time for you to check the terms of your current mortgage instead.

Perhaps you would be better off remortgaging especially if you’re nearing the end of a fixed-rate term and want to release funds quickly. Be aware of any early-exit penalty charges and compare the different mortgage rates available. It is also worth seeking answers from an estate agent as they can tailor their professional mortgage advice to suit your personal circumstances.

What if you gift or leave a property to someone?

It is also worth understanding what happens when you leave a property to be inherited or pass it on as a gift. It is common for parents or other relatives to leave properties in their will to be inherited. In this case, there is no capital gains tax, however, you will likely need to pay inheritance tax, which is another story.

It is worth noting, however, that if you then sell the property that has been inherited, you will have to pay capital gains tax as normal. If you gift a property as a gift it will still be subject to capital gains tax rules.

They could also be subject to inheritance tax if you give the property as a gift when you are alive, but die within seven years of giving the gift.

It is, therefore, a good idea to minimise your capital gains tax when you sell a buy-to-let property otherwise you may be paying unnecessary tax. It is a great idea to speak with an accounting professional who will be able to give you accurate and relevant advice in regard to your personal situation. 

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