If you own property for rental and you decide to sell, you will be liable for Capital Gains Tax (CGT) as well as personal income tax. CGT is payable on the profit you make when you sell the property, so it’s important to understand how to calculate your liability.
This brief guide to capital gains tax implications for landlords 2021 explains how to make that calculation. It also explains when and how to make payment, and provides advice on ways to reduce your liability. However, in certain situations the calculations can be more complex, so it may pay to take professional advice to ensure you pay the minimum amount of CGT within HMRC’s guidelines.
Your personal circumstances
If you are a part-time or full-time landlord, you are liable to CGT. It doesn’t matter if you are employed in another job, unemployed, self-employed running your own business or a partner in another business.
However, if you run your landlord business through a limited company, you will be liable to Corporation Tax rather than CGT on any profit. We will cover this point later in the article.
Related: Transferring Ownership of Property from Parent to Child
Calculating basic CGT liability
CGT is calculated on the difference between the price of the rental property when you bought it and the price you achieved when you sold it.
At its simplest, if you bought a property for £150,000 in 2018 and sell it for £300,000 in 2021, you pay CGT on your gross profit of £150,000.
However, to calculate the net profit, you need to deduct a number of allowable expenses. For CGT, allowable expenses include:
- Fees to solicitors, surveyors and estate agents relating to the purchase and sale of the property.
- Stamp duty at the rate you paid when you purchased the property.
- Costs of improvements to the property, such as new kitchen, extension, loft conversion, addition of garage or permanent parking space, including cost of materials, fees to builders and other trades and relevant professional fees.
It’s important to note that the allowable expenses for CGT are different to those you incur for maintaining a rental property. The ‘running costs’ are covered in another article - landlord allowable expenses 2021.
Taking our initial example, you can deduct the following expenses:
- Fees for buying and selling - £10,000
- Stamp duty at 2018 rate of 2 percent of buying price - £3,000
- Costs of improvements - £35,000 Allowable expenses total £48,000.
So, your CGT liability is now £150,000 - £48,000 = £102,000.
Related: Green Homes Grant: How Can Homeowners And Landlords Benefit
Changing Stamp Duty rates on recent property purchases
If you completed a purchase for a rental property after July 8th 2020, remember to factor the changes in Stamp Duty into your CTG calculations. Under changes made by the Chancellor the following rates of Stamp Duty and second home surcharge applied.
- Properties up to £500,000 – 3 percent surcharge only
- Properties between £500,000 and £925,000 – 5 percent plus 3 percent surcharge
- Properties between £925,000 and £1.5 million – 10 percent plus 3 percent surcharge
- Properties over £1.5 million – 12 percent plus 3 percent surcharge
The changes originally applied to purchases completed by 31st March 2021. This was then extended to 30th June 2021, to be followed by a further extension to 30th September 2021. The lower limit of £500,000 reduces to £250,000 between the end of June and the end of September 2021.
Calculating your full tax liability
The amount of CGT you pay will be based on your liability as you calculated it above, but the CGT rate you pay depends on your personal income tax rate. This is because adding together your CGT liability and personal income may take you into a higher tax bracket.
Don’t forget to take account of your allowances for both CGT and income tax when making your calculations. These are the allowances for tax year 2021 – 2022:
- CGT allowance is £12,300
- Personal income tax allowance is £12,570
Assuming your income from employment or self-employment is £45,000, you would pay tax at the basic rate of 20 percent on £32,430 (£45,000 minus personal allowance of £12,570). Your personal income tax bill will be £6,486.
Adding your CGT liability of £102,000 minus CGT allowance of £12,300 adds £89,700 to your total income for the tax year. Your total income is £122,130.
You pay CGT at the rate of 18 percent on gains between £12,301 and £50,270 - £37,969. The payment due will be £6,834.You pay CGT at the rate of 28 percent on the balance of £71,860 (£122,130 minus £50,270). The payment due will be £20,121.
Adding your CGT payments of £26,955 to your personal income tax bill of £6,486 gives you a total tax bill of £33,441.
When and how to pay CGT
If you sell a rental property after April 2020, you must report the sale and the profit to HMRC via HMRC’s ‘real time’ CGT service.
You will have to set up a Capital Gains Tax on your UK property account, report the sale and make payment within 30 days of the completion of the sale. If not, you may face interest and penalty charges.
Reducing CGT liability through Private Residence Relief
If you lived in a rental property as your main residence for a period of time and plan to sell it, you may be liable to Private Residence Relief (PRR), which can reduce your CGT liability.For example, you bought a property in May 2013 and lived in it as your main residence for the first four years before renting it out and subsequently selling it in May 2021, you can claim PRR for your four years of residency and the final nine months before the sale – a total of 57 months out of 96.
Using the original example, your profit for CGT is £102,000 after deduction of allowable expenses.
Taking account of PRR for 57 months reduces your CGT liability by £60,562, leaving a liability of £41,438 (£102,000/96 x 57).
Reducing property tax costs by setting up a limited company
The cost of CGT has encouraged landlords to set up limited companies to run their businesses. As a limited company, your tax would be paid by the company, rather than by you as an individual.
The tax rate is also lower, as your company would pay Corporation Tax of 19 percent on the profit of the property sale, rather than 28 percent on profits over £50,271.
However, you should be aware that you will also incur any costs of setting up the company and any reporting responsibilities that go with it.
Get in touch with us for property tax advice or if you’re thinking of selling
This is a brief outline of the implications of CGT on rental property sales. If you would like to discuss the CGT implications for your property sale, our partner small business accountants will be glad to help. To find out more, please contact us on 020 7099 4000.
If you are thinking of selling your property, find out how much it is worth in just 60 seconds with our instant property valuation tool. Or, get in touch and one of our Sales Managers will be happy to pop over and give you a more accurate valuation.