HOW TO AVOID CAPITAL GAINS TAX FOR LANDLORDS IN THE UK 2024
Tom Condon
December 14th, 2023
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Looking how you can avoid Capital Gains Tax for landlords? Well you’re in the right place. Whether you are selling a piece of land, a second home, a buy to let property or your main residence, it’s important you understand Capital Gains Tax, as not paying it is a criminal offence.
In 2023, Capital Gains Tax was reduced for the first time in 35 years, and is set to reduce a further 50% by April 2024. HMRC predicts that this reduction will mean 100,000 more homesellers will face Capital Gains Tax.
However, there are some ways to reduce or avoid Capital Gains Tax for landlords, and we will cover this and more below!
Capital Gains Tax is charged on any monetary gain or profit from a sold, gifted or exchanged asset. You will only be taxed on the amount of profit and the proceeds go towards the UK Government.
In order to calculate the profit on an asset transaction, you will need to:
(Value of asset at time of transaction) – (value of asset when originally sourced) = Profit.
When does Capital Gains Tax for landlords apply?
When there is profit from a property transaction, the Capital Gains Tax must be paid within 60 days after completion of the house sale.
In a property transaction, you will exchange contracts with the buyer and this in context with Capital Gains Tax, is known as disposal. Disposal is the date that HMRC regards as the completion of sale and is when the CGT countdown begins.
How do you pay Capital Gains Tax on BTL property?
The Capital Gains Tax for landlords deadline is self reported which means that you should hire the assistance of a qualified accountant, tax advisor or online software. This will allow you to ensure you have calculated the right amount of Capital Gains Tax, and is inline with current HMRC directives.
If you do not pay the correct amount of Capital Gains Tax by your 60 day deadline, you will be liable for penalties, and possible prosecution.
What is the Capital Gains Tax allowance for landlords?
In the UK, landlords are subject to Capital Gains Tax (CGT) on the profit they make when they sell a property that has increased in value. However, not all of this profit is immediately taxable. Landlords qualify for what is known as the Capital Gains Tax Allowance, or the Annual Exempt Amount (AEA).
This is a tax-free threshold set by the government, below which any capital gains are not subject to taxation.
The AEA functions as a buffer for small gains. Each fiscal year, the government sets the AEA, and any profit made on the sale of assets (including property) up to this amount is exempt from CGT.
It’s important to note that this allowance is per individual, so if a property is owned jointly, each owner has their own AEA. This can significantly reduce the overall tax liability for joint property owners.
For landlords, this allowance is particularly relevant when selling a rental property. The profit (or ‘gain’) is usually the difference between the price for which they sell the property and the price they originally paid for it.
If this gain exceeds the AEA, CGT will be due on the excess amount. It’s crucial for landlords to understand that the allowance applies to the gain, not the total sale price of the property.
For 2023/24 it was announced that Capital Gains Tax for landlords was to be halved more than 50% from £12,300 to £6,000, and will be halved again in April 2024. This would be the Capital Gains Tax allowance reduction at more than 75% and increase tax pressures for many landlords and investors.
Currently, anyone who sells a property and gains a profit of more than £6,000 will need to Capital Gains Tax according to their marginal tax rate.
What are the marginal tax rates for landlords 2024?
Which marginal tax rate a landlord is in, will depend on their annual income, including any rental income:
- Basic rate taxpayer: £12,571 to £50,270
- Higher rate taxpayer: £50,271 to £125,139
- Additional rate taxpayer: Over £125,140
If you usually sit within the basic rate bracket but within the influx of your capital gain, your income makes you a higher rate taxpayer, then you may be liable to the higher rate taxpayer bracket.
Does the Making Tax Digital Initiative affect Capital Gains Tax?
Under the UK Government’s Making Tax Digital (MTD) initiative, all taxpayers will be moved across to a fully digitalised system.
Under the Simple Assessment, HMRC will assess a person’s liability to Capital Gains Tax, without the taxpayer having to fill out and submit the tax return.
Unfortunately, landlords do in fact need to pay Capital Gains Tax for BTL property. The annual exempt amount has dropped more than 50% which means more landlords and investors will be paying CGT on Buy To Let properties more often depending on their tax bracket.
How much Capital Gains Tax will I pay on my rental property?
By 2024/25, property investors and landlords who make any gains on property over £3,000 will be taxed. This would mean that if you landed within the Additional Taxpayer bracket of 28%, you would be liable to an extra £2,604.
Currently however, here are the Capital Gains Tax for landlords rates according to the tax bracket you are in:
| Tax bracket | CGT rate on assets | CGT rate on property |
|---|---|---|
| Basic rate taxpayer | 10% | 18% |
| Higher rate taxpayer | 20% | 28% |
| Additional rate taxpayer | 20% | 28% |
Luckily there are some exemptions for landlords paying Capital Gains Tax on BTL property. We would recommend planning with your financial advisor the best route for you:
Multiple property owners
If there are more than one owners of a property then the Capital Gains Tax Allowance is multiplied between the owners. If any of the other owners haven’t used their AEA for that tax year then you could transfer a property into a joint ownership before the sale.
For example, if two landlords sell a jointly owned property at a profit of £10,000 then no Capital Gains Tax for landlords will be due given that the tax free allowance of £6,000 per landlord has not been met.
Letting Relief
Letting relief is only applicable to landlords who have or still do live within the property they are letting out.
If you meet the criteria, the letting relief can cover up to £40,000 on chargeable gains of a property sale.
Private Residence Relief
If you have lived within the property within 9 months before selling it and can prove it; you should be able claim Private Residence Relief.
Private Residence Relief applies to landlords who have lived in the property before or after renting it out, or landlords who rent out a part of their property while living in the rest.
Capital Gains Tax Rollover Relief
Short term lets like furnished holiday lettings may be eligible for Rollover Relief, which is where a landlord will reinvest all or some of the property profit then they can defer the Capital Gains Tax by claiming Rollover Relief. This is not available for Buy To Let properties.
Limited companies
Limited companies are liable for corporation tax and not capital gains tax. This means that if the property is held as an asset within a limited company, then you would be exempt from Capital Gains Tax.
However, the minimum rate of corporation tax is 19% over £50,000 profit – which is quite considerable and counterproductive as you would need to sell the house to the limited company in the first place.
- This is your only property.
- You’ve lived in the property as your main residence for all the time you have been the legal owner.
- The property has not been used exclusively for commercial purposes.
- The property was bought with the intention to make profit.
CAN YOU CLAIM PRIVATE RESIDENCE RELIEF AND LETTING RELIEF?
Depending on the circumstances, you may be entitled to claim both Private Residence Relief and Letting Relief. If part of your home is rented out, then you will need to work out what proportion of the property you lived in as this will be the proportion you can claim relief on. For example, if you rented out a spare bedroom to a tenant and that is 7.5% off your home. When you sell the property, you make a chargeable gain of £65,000 As 7.5% of your property was let to a tenant, you will receive PRR on 92.5% of the total gain. You should also be able to claim Letting Relief on the remaining 10% and therefore not be liable to any CGT.If you move into your buy to let rental property you could benefit from Private Residence Relief, but this will only mean you pay Capital Gains Tax for the amount of time you occupy the property and any profit made in the nine months prior to sale.
You will not be liable for Capital Gains Tax after letting your house, instead, you will be liable for Capital Gains Tax if you make a profit when you sell the property. That is, if PRR and Letting Relief do not apply to you.
To completely avoid Capital Gains Tax, you will need to prove that you have lived in the property as your main residence for at least 2 years, while not letting the property out.
Start your property portfolio today!
Looking how you can avoid Capital Gains Tax for landlords? Well you’re in the right place. Whether you are selling a piece of land, a second home, a buy to let property or your main residence, it’s important you understand Capital Gains Tax, as not paying it is a criminal offence.
In 2023, Capital Gains Tax was reduced for the first time in 35 years, and is set to reduce a further 50% by April 2024. HMRC predicts that this reduction will mean 100,000 more homesellers will face Capital Gains Tax.
However, there are some ways to reduce or avoid Capital Gains Tax for landlords, and we will cover this and more below!
Capital Gains Tax is charged on any monetary gain or profit from a sold, gifted or exchanged asset. You will only be taxed on the amount of profit and the proceeds go towards the UK Government.
In order to calculate the profit on an asset transaction, you will need to:
(Value of asset at time of transaction) – (value of asset when originally sourced) = Profit.
When does Capital Gains Tax for landlords apply?
When there is profit from a property transaction, the Capital Gains Tax must be paid within 60 days after completion of the house sale.
In a property transaction, you will exchange contracts with the buyer and this in context with Capital Gains Tax, is known as disposal. Disposal is the date that HMRC regards as the completion of sale and is when the CGT countdown begins.
How do you pay Capital Gains Tax on BTL property?
The Capital Gains Tax for landlords deadline is self reported which means that you should hire the assistance of a qualified accountant, tax advisor or online software. This will allow you to ensure you have calculated the right amount of Capital Gains Tax, and is inline with current HMRC directives.
If you do not pay the correct amount of Capital Gains Tax by your 60 day deadline, you will be liable for penalties, and possible prosecution.
What is the Capital Gains Tax allowance for landlords?
In the UK, landlords are subject to Capital Gains Tax (CGT) on the profit they make when they sell a property that has increased in value. However, not all of this profit is immediately taxable. Landlords qualify for what is known as the Capital Gains Tax Allowance, or the Annual Exempt Amount (AEA).
This is a tax-free threshold set by the government, below which any capital gains are not subject to taxation.
The AEA functions as a buffer for small gains. Each fiscal year, the government sets the AEA, and any profit made on the sale of assets (including property) up to this amount is exempt from CGT.
It’s important to note that this allowance is per individual, so if a property is owned jointly, each owner has their own AEA. This can significantly reduce the overall tax liability for joint property owners.
For landlords, this allowance is particularly relevant when selling a rental property. The profit (or ‘gain’) is usually the difference between the price for which they sell the property and the price they originally paid for it.
If this gain exceeds the AEA, CGT will be due on the excess amount. It’s crucial for landlords to understand that the allowance applies to the gain, not the total sale price of the property.
For 2023/24 it was announced that Capital Gains Tax for landlords was to be halved more than 50% from £12,300 to £6,000, and will be halved again in April 2024. This would be the Capital Gains Tax allowance reduction at more than 75% and increase tax pressures for many landlords and investors.
Currently, anyone who sells a property and gains a profit of more than £6,000 will need to Capital Gains Tax according to their marginal tax rate.
What are the marginal tax rates for landlords 2024?
Which marginal tax rate a landlord is in, will depend on their annual income, including any rental income:
- Basic rate taxpayer: £12,571 to £50,270
- Higher rate taxpayer: £50,271 to £125,139
- Additional rate taxpayer: Over £125,140
If you usually sit within the basic rate bracket but within the influx of your capital gain, your income makes you a higher rate taxpayer, then you may be liable to the higher rate taxpayer bracket.
Does the Making Tax Digital Initiative affect Capital Gains Tax?
Under the UK Government’s Making Tax Digital (MTD) initiative, all taxpayers will be moved across to a fully digitalised system.
Under the Simple Assessment, HMRC will assess a person’s liability to Capital Gains Tax, without the taxpayer having to fill out and submit the tax return.
Unfortunately, landlords do in fact need to pay Capital Gains Tax for BTL property. The annual exempt amount has dropped more than 50% which means more landlords and investors will be paying CGT on Buy To Let properties more often depending on their tax bracket.
How much Capital Gains Tax will I pay on my rental property?
By 2024/25, property investors and landlords who make any gains on property over £3,000 will be taxed. This would mean that if you landed within the Additional Taxpayer bracket of 28%, you would be liable to an extra £2,604.
Currently however, here are the Capital Gains Tax for landlords rates according to the tax bracket you are in:
| Tax bracket | CGT rate on assets | CGT rate on property |
|---|---|---|
| Basic rate taxpayer | 10% | 18% |
| Higher rate taxpayer | 20% | 28% |
| Additional rate taxpayer | 20% | 28% |
Luckily there are some exemptions for landlords paying Capital Gains Tax on BTL property. We would recommend planning with your financial advisor the best route for you:
Multiple property owners
If there are more than one owners of a property then the Capital Gains Tax Allowance is multiplied between the owners. If any of the other owners haven’t used their AEA for that tax year then you could transfer a property into a joint ownership before the sale.
For example, if two landlords sell a jointly owned property at a profit of £10,000 then no Capital Gains Tax for landlords will be due given that the tax free allowance of £6,000 per landlord has not been met.
Letting Relief
Letting relief is only applicable to landlords who have or still do live within the property they are letting out.
If you meet the criteria, the letting relief can cover up to £40,000 on chargeable gains of a property sale.
Private Residence Relief
If you have lived within the property within 9 months before selling it and can prove it; you should be able claim Private Residence Relief.
Private Residence Relief applies to landlords who have lived in the property before or after renting it out, or landlords who rent out a part of their property while living in the rest.
Capital Gains Tax Rollover Relief
Short term lets like furnished holiday lettings may be eligible for Rollover Relief, which is where a landlord will reinvest all or some of the property profit then they can defer the Capital Gains Tax by claiming Rollover Relief. This is not available for Buy To Let properties.
Limited companies
Limited companies are liable for corporation tax and not capital gains tax. This means that if the property is held as an asset within a limited company, then you would be exempt from Capital Gains Tax.
However, the minimum rate of corporation tax is 19% over £50,000 profit – which is quite considerable and counterproductive as you would need to sell the house to the limited company in the first place.
- This is your only property.
- You’ve lived in the property as your main residence for all the time you have been the legal owner.
- The property has not been used exclusively for commercial purposes.
- The property was bought with the intention to make profit.
CAN YOU CLAIM PRIVATE RESIDENCE RELIEF AND LETTING RELIEF?
Depending on the circumstances, you may be entitled to claim both Private Residence Relief and Letting Relief. If part of your home is rented out, then you will need to work out what proportion of the property you lived in as this will be the proportion you can claim relief on. For example, if you rented out a spare bedroom to a tenant and that is 7.5% off your home. When you sell the property, you make a chargeable gain of £65,000 As 7.5% of your property was let to a tenant, you will receive PRR on 92.5% of the total gain. You should also be able to claim Letting Relief on the remaining 10% and therefore not be liable to any CGT.If you move into your buy to let rental property you could benefit from Private Residence Relief, but this will only mean you pay Capital Gains Tax for the amount of time you occupy the property and any profit made in the nine months prior to sale.
You will not be liable for Capital Gains Tax after letting your house, instead, you will be liable for Capital Gains Tax if you make a profit when you sell the property. That is, if PRR and Letting Relief do not apply to you.
To completely avoid Capital Gains Tax, you will need to prove that you have lived in the property as your main residence for at least 2 years, while not letting the property out.
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