How to Avoid Capital Gains Tax on Buy-to-let Property

A buy-to-let property has a range of benefits, including regular income in the form of monthly rent and long-term appreciation if it grows in value over time. But it’s not all bells and whistles, especially if you want to sell the property after it has increased significantly in value. In this scenario, you’d be required to pay capital gains tax. With that in mind, this guide has everything you need to know about potentially avoiding capital gains tax on a buy-to-let property. 

What is Capital Gains Tax?

CGT is due on profits exceeding your annual allowance when selling an asset like property. Let’s say you purchase a house for £200,000 and sell it for £300,000. That £100,000 is profit, and you’ll likely need to pay capital gains tax on it, minus any allowances of course.

Your tax rate isn’t one-size-fits-all, though. It varies based on annual income and the type of asset you’re selling. It’s not just about property either – everything from stocks and bonds to cars may be liable for capital gains tax. 

CGT: Two different rates based on income

Whether a person falls into the basic or higher rate tax band is determined by their total taxable income for the tax year. Here’s how it works for 2024/25:

1. Basic Rate: Taxable income up to £50,270. For CGT, if the capital gain doesn’t push total income over this threshold, the lower rate of 18% (on property) applies.
2. Higher Rate: Taxable income over £50,270. Gains that cause your income to exceed this amount are taxed at the higher CGT rate of 28% for property.

In cases where gains partially cross income brackets, a blended rate may apply.

Are there any reliefs for buy-to-let capital gains tax?

If you’ve ever rented out a property which you then later sell, you might be eligible for tax relief that can lower your CGT obligations.

Is my buy-to-let property eligible for Private Residence Relief?

Private Residence Relief (PRR) primarily reduces Capital Gains Tax on a property if it served as the owner’s main residence at any point. This relief extends to the entire period it was their primary home, with an additional nine-month exemption period following that occupancy, regardless of its later use. This provision can reduce the taxable gain on properties that were once owner-occupied before becoming buy-to-let investments.

For example, if you bought a property in July 2012 for £200,000 and sold it in July 2022 for £300,000, your capital gain would be £100,000. If you lived in the property for the first six years (72 months) and rented it out for the remaining four years, PRR would apply to 81 of the 120 months you owned the property – 72 months of residence plus the last nine extra months. In this case, your relief would be £67,500, calculated as (£100,000 divided by 120 months) x 81 months. Therefore, you’d be taxed on a capital gain of £32,500.

Am I eligible for letting relief?

Previously, letting relief allowed landlords to reduce their CGT by up to £40,000 if the property had been their primary residence at some point. However, this changed in April 2020, essentially eliminating this relief for most buy-to-let landlords. Now, to qualify, you must have resided in the property concurrently with your tenant(s) i.e. if you rented out a room to a tenant while you lived in the property. Landlords who meet this criterion would typically be eligible for PRR.

Can I make any deductions on my buy-to-let capital gains tax?

You’re entitled to an annual CGT personal allowance, similar to your income tax personal allowance. The annual Capital Gains Tax (CGT) allowance in the UK for the 2023/24 tax year is £6,000 for individuals and £3,000 for most trusts. This amount represents the tax-free threshold, meaning any capital gains within this limit are exempt from CGT. Gains exceeding this allowance are taxed at applicable rates based on income and the type of asset.

Subtracting expenses from a capital gain works by deducting allowable costs from the sale proceeds to reduce the taxable gain. Here’s how it generally breaks down:

1. Identify Sale Proceeds: This is the amount received from selling the property or asset.
2. Deduct Acquisition Costs: Subtract the original purchase price and any associated costs, like stamp duty and legal fees.
3. Subtract Capital Improvement Expenses: Deduct costs for property enhancements (like adding extensions) but not for maintenance.
4. Calculate Net Gain: The remaining amount after deductions is the capital gain subject to CGT.

Calculating CGT example

Here’s an example of how to calculate the taxable capital gain on a buy-to-let property purchased for £200,000 and sold for £250,000:

1. Calculate Initial Gain:
   Sale price (£250,000) – Purchase price (£200,000) = £50,000 capital gain.
2. Deduct Allowable Expenses:
   Suppose you paid the following:
   • Legal fees: £5,000
   • Stamp Duty Land Tax (SDLT):
     For buy-to-let properties, SDLT includes a surcharge:
     • If purchased before 31 October 2024, the surcharge was 3%. For a purchase price of £200,000: £200,000×3%=£6,000
     • If purchased on or after 31 October 2024, the surcharge increased to 5%: £200,000×5%=£10,000
   • Improvements: £7,000

   Total allowable expenses:

   Legal fees (£5,000) + SDLT (£6,000 or £10,000) + Improvements (£7,000)

   • If purchased before 31 October 2024, total expenses = £18,000.
   • If purchased on or after 31 October 2024, total expenses = £22,000.
3. Net Gain After Expenses:
   Subtract total expenses from the initial gain:
   • If purchased before 31 October 2024: £50,000−£18,000=£32,000
   • If purchased on or after 31 October 2024: £50,000−£22,000=£28,000
4. Apply Annual CGT Allowance:
   For the 2024/25 tax year, the allowance is £6,000. Subtract this allowance from the net gain:
   • If purchased before 31 October 2024: £32,000−£6,000=£26,000 taxable gain
   • If purchased on or after 31 October 2024: £28,000−£6,000=£22,000 taxable gain

1. Calculate CGT Payable:
   CGT rates for residential property are as follows:
   • 18% for basic rate taxpayers
   • 28% for higher or additional rate taxpayers
   • For a basic rate taxpayer:
     • If purchased before 31 October 2024: £26,000×18%=£4,680
     • If purchased on or after 31 October 2024: £22,000×18%=£3,960
   • For a higher/additional rate taxpayer:
     • If purchased before 31 October 2024: £26,000×28%=£7,280
     • If purchased on or after 31 October 2024: £22,000×28%=£6,160

Are there any exceptions on buy-to-let capital gains tax?

Recent amendments to the rules governing the buy-to-let sector and associated mortgages have financially impacted many landlords. To mitigate this, an increasing number of buy-to-let landlords are establishing limited companies to manage their property portfolios and reduce their tax liabilities. 

Profits from property sales made through a limited company are subject to corporation tax, which is currently 19%. This is a more appealing rate for investors compared to the 28% CGT rate for higher-rate taxpayers.

For instance, let’s consider a buy-to-let landlord who has a £60,000 profit from selling a property. They fall into the higher tax bracket, don’t qualify for PRR, and have already exhausted their personal allowance. 

In this scenario, they could be looking at a CGT bill of as much as £16,800. However, if they were to sell the same property through a limited company, their corporation tax liability would be limited to a maximum of £11,400.

Best ways to reduce capital gains tax for my buy-to-let

So, what’s the best way to reduce the amount of capital gains tax you pay on a property? Here are some effective strategies to minimise your capital gains liability when selling a rental property.

Maximise your annual capital gains tax allowance

Utilising the annual allowance can reduce your tax bill, especially if you have no other capital gains for the year.

Take advantage of deductible expenses

When selling your rental property, certain costs can be subtracted from your capital gain. These include:

• Capital improvements like adding a conservatory
• Legal fees
• Estate agent charges
• Stamp Duty or equivalent at purchase
• Survey costs
• Advertising expenses for finding a buyer

Consider living in your rental property

If the property you’re selling was once your primary residence, you could qualify for Principal Private Residence Relief. This relief can exempt you from CGT for the period you lived in the property, as well as for the last nine months before the sale.

Utilise your spouse’s tax band

Transferring assets between spouses is generally free from capital gains tax. This can be a strategic move if one spouse has already used up their annual allowance. The property can be transferred to the other spouse, who can then use their full tax-free amount.

Opt for a corporate structure

Holding your rental properties in a limited company can offer several tax advantages. As of April 2023, corporation tax rates range from 19% to 25%, which can be more favourable compared to the 28% CGT rate for higher-rate taxpayers.

By employing these strategies, you can optimise your tax situation and potentially save a significant amount on your capital gains tax bill. However, it’s always advisable to consult a tax professional for tailored advice.

Summary: Gains

Avoiding capital gains tax altogether is tricky if your buy-to-let property has increased in value, but there are ways to minimise the amount you owe. Take advantage of these, and you could save thousands of pounds.

If you’re thinking of selling your buy-to-let property and are after a quick sale, look no further than Property Rescue. We buy your rental home fast without any of the hassle and stress associated with the traditional selling process. Get a free, no-obligation quote and see how much your buy-to-let property is worth.