how to avoid capital gains tax on buy-to-let property

Capital gains tax is a tax that is paid on the appreciation of a property but there are slight differences on how this applies to residential properties and how this applies to normal buy to lets.

In this article we will therefore be discussing how you can avoid paying capital gains on a buy to let property first and foremost and then moving on to how you can reduce your tax bill if you do have to pay it.

Finally, if you’re still confused, at the very end we’ll be going over how capital gains tax is calculated in the first place so you can gain a better understanding on the tax and how the regulations are laid out in the UK.

It is vital you understand all the ways you can be taxed on your property if invested in any sort of property business such as stamp duty for buy to lets as well as the technical part of the process like deciding on a deposit for your buy to let too.

Is it possible to avoid paying tax on a buy to let property?

No, it is not possible to completely avoid paying capital gains tax on a property as there are rules in place that state that if you are buying a buy to let or a second home you will have to pay this tax.

So, unfortunately, if you are looking to completely evade this tax then there is little you can do and the most you can do as a buy to let landlord is find ways to reduce your capital gains tax bill by getting creative.

Capital gains tax explained

For an in depth guide on what capital gains tax is, be sure to read our article on the topic. However, capital gains tax is essentially just an easy way for the government to tax the profit made on the sale of a house.

As an example, if a house was bought for £200,000 and then was sold for £300,000 a few years later, there is then a gain on the property of £100,000 that has to be taxed.

Capital gains isn’t always this straightforward as there are exemptions and different rates in which the tax is paid. But either way, a landlord should know about the laws so they pay their tax on time and are able to factor it into a sale and aren’t caught off guard.

Why do you need to pay capital gains tax on a buy to let property?

Upon selling a buy-to-let property, the owner may be liable for capital gains tax (CGT) on the profit gained and in fact, the same is true for precious items such as jewellery, artwork, and shares worth more than £6,000. 

It is basically the government’s way of taxing those who choose to make money from buying and selling commodities that they know go up in value. However, most do not pay this tax when selling their primary residence, but you have to pay it when it comes to buy to lets.

The requirements for reporting and paying capital gains tax on buy-to-let properties changed in April 2020, and the deadline was extended to 60 days from 30 on October 27th, 2021 which means you only have less of a limited time to calculate, notify, and pay the CGT you owe the HMRC.

It is critical to remember that neglecting to inform HMRC of the transaction within the tax year may result in interest and penalties if you miss a deadline for whatever reason. 

So, if you sold your rental property in March 2020, for example, you would have to declare it on your self-assessment tax return and paid CGT on your 2020/21 tax return.

If you sold a rental property on October 28th, 2021, you had until December 27th, 2021, to complete the relevant papers and pay HMRC. This is an improvement over the original law from April 2020, which only provided a 30-day timeframe, but it is still insufficient.

Under what circumstances do you have to pay capital gains tax?

You have to pay capital gains tax on a property, not just on the sale of a house. If you are giving away a house, exchanging it or disposing of the buy to let property in any way you’d have to pay capital gains tax.

It is important you consider your options with someone who is able to give mortgage advice such as a mortgage broker or a solicitor if you’re not sure you have to pay tax based on your individual circumstances.

What are the ways in which you can reduce your CGT bill on a buy-to-let property?

As part of the rules surrounding buy to lets, there are a series of regulations and individual laws that make sure that the capital gains tax bill of a property is able to be reduced, even if you can’t avoid it.

Make sure you’re using your tax-free allowance

There is a tax free allowance that is classed as personal income available to everyone. For the 2021 tax year this was £12,300 and has since bumped up to £12,570 in 2023.

This amount of money cannot be carried over to the next year as there is an allowance given to each person every year that must be filled up. As a result, sometimes it makes sense to sell a buy to let property a year later if you already have used up your allowance.

Nonetheless, if you already have a salary in which you are getting paid from that is over £12,570 then there is a good chance that you will be able to use the allowance up anyway without even selling your buy to let so this may not work.

Another trick you can take advantage of when it comes to filling out a tax free allowance is combining the allowances of a married couple. With two people involved in the marriage you can claim up to £25,140 completely tax free.

Own the property with a spouse

Are you and your husband or civil partner considering selling a home that is owned by one of you? If this is the case, you should think about transferring some or all of the property to the other individual as this can help to lower the amount of capital gains tax you owe.

It’s also worth noting that married couples and civil partners have the option of doubling their CGT tax-free limit. 

This implies that by transferring ownership of the property, you may essentially increase your tax-free limit while saving money on CGT. 

Moreover, moving some of your partner’s tax-free allowance to you can help to reduce the overall amount of CGT you’ll have to pay if your partner is in a lower tax band than you.

Make sure you have a limited company set up

Are you a landlord who wants to lower your capital gains tax (CGT) burden when you sell your properties? A limited business is one method to do this.

This is because CGT only applies to individual sales of residential properties and profits from the sale of a rental property are covered by corporation tax, which is presently 19% when utilising a limited company form. 

Buying BTL homes through a limited company is a good choice for higher rate taxpayers since it allows them to avoid the 28% CGT that they would otherwise have to pay.

Hence, if you’re a BTL landlord looking to reduce your CGT obligation, think about forming a limited company to conduct your property transactions.

Consider if a property qualifies for Private Residence Relief

If you’re a buy-to-let (BTL) landlord considering selling a home that was formerly your primary residence, you should be aware of Private Residence Relief (PRR). This is a tax break that might assist you in lowering your capital gains tax (CGT) due.

You must have made the BTL property your primary residence before selling it to be eligible for PRR. This implies you can claim the relief for both the years you lived in the property and the nine months preceding the sale. By claiming PRR, you will effectively minimise the amount of CGT due on the sale of the property.

So, if you’re a BTL landlord who lived in one of your properties before selling it, check to see if you qualify for Private Residence Relief. That may wind up saving you a substantial amount of money in CGT.

How do you calculate capital gains tax?

When it comes to selling a buy-to-let (BTL) property, there are a few key points to remember. First and foremost, it is critical to note that the majority of BTL properties are subject to capital gains tax (CGT). 

On any profit made on the value of the property since it was purchased, this tax is charged at either 28% for higher-rate taxpayers or 18% for basic-rate taxpayers.

If you are a basic-rate taxpayer and are thinking about selling a BTL property, you should seek professional tax planning advice from an accountant first. 

This is due to the fact that the gain or profit you make from selling the property will be added to your income, potentially pushing you into a higher-rate tax bracket.

It is worth noting, however, that every taxpayer has a £12,300 tax-free capital gains allowance (2022-23). This means that CGT is only due on gains that exceed this threshold.

Furthermore, the owner/seller of the BTL property can deduct certain allowable costs, such as stamp duty from the original purchase, solicitor fees from selling the property, estate agent fees from selling the property.

Also, the cost of any capital improvements, such as an extension, work to improve energy efficiency, or a new kitchen can also be deducted.

However, it is important to remember that property owners are not permitted to deduct outgoings such as property maintenance or mortgage interest payments.

What is the rate of capital gains tax on buy-to-let property?

So you’re considering selling your buy-to-let (BTL) property and want to know how much capital gains tax (CGT) you’ll have to pay. The answer is that it depends on your taxable income.

If you are a basic rate taxpayer with an annual income of £50,000 or less, your CGT rate will be 18%. However, if you are a higher rate taxpayer earning £50,001 or more, you will pay a higher rate of 28%.

As an example, suppose you purchased a rental property ten years ago for £100,000 and are now selling it for £150,000. That means you’ve made a £50,000 profit. 

The taxable gain is £37,700 after deducting your CGT allowance, which is currently £12,300 (2022-23). Assuming no other tax breaks, your CGT bill on this transaction would be £6,786 for basic-rate taxpayers or £10,556 for higher-rate taxpayers.

The good news is that capital gains are taxed separately from other income, so your other income tax bracket will not be affected.

If you reinvest the money, do you still pay capital gains tax?

Are you considering selling your buy-to-let property and reinvesting the proceeds in another? To be clear, you will still have to pay capital gains tax (CGT).

The good news is that CGT is not applied to the total proceeds of the sale. Instead, you can deduct the amount you paid for the property ten years ago and use it to offset costs such as solicitors and estate agent’s fees, as well as stamp duty.

If you want to invest in property without having to deal with CGT and corporation tax, you should consider putting your money into a Real Estate Investment Trust (REIT).

A REIT is a property investment trust that mimics direct investment in UK real estate. You will not have to pay corporation tax on rental income or gains from the sale of investment properties if you invest through a REIT (and shares in property investment companies).

REIT shares can be held in an ISA (subject to ISA limits), which means they are likely tax-free. If you want to benefit from property market gains while simplifying your tax situation, this could be a great option for you.

What happens if you live in a buy to let by yourself? 

If you think you’re living in a buy to let property, then there is a good chance that the property isn’t actually a buy to let as if you have taken out a buy to let mortgage on a property, this means it is against the mortgage terms to live in it.

So, double check if you actually have a buy to let mortgage or if there is a chance that you, as a landlord have gotten something wrong.

However, it is possible to live with your tenants if you have a lodging agreement in place but this isn’t classed as a buy to let property and it is instead a standard residential mortgage.

To conclude, can you avoid paying CGT?

Finally, for buy-to-let (BTL) landlords wishing to sell their homes, capital gains tax (CGT) can be a major burden. There are, however, various ways that may be employed to reduce this tax burden. 

Options include transferring property ownership to a spouse, forming a limited business, and claiming Private Residence Relief (PRR) if the property was formerly your primary abode. 

Using these strategies, BTL landlords can avoid paying more CGT than required while increasing their profits from property sales. Before making any tax-related choices, it is important to get the opinion of a certified specialist.