Selling your BTL property – things to look out for
If you are thinking of selling up your properties for any reason (including transferring them to a limited company), it’s essential that you get specialist tax advice beforehand.
It’s because the rules are very different to those which apply when you sell your own home. When you sell a home that has been your only or main residence throughout the period of ownership, you qualify for private residence relief (except in rare circumstances) – which means you don’t pay Capital Gains Tax (CGT).
Capital Gains Tax on buy-to-let properties
If you sell a property that you have rented out, then you have to pay Capital Gains Tax. The taxable amount is the difference between the purchase price and the sale price – so if you bought a property for £150,000 and sell it for £300,000, then you will be charged CGT at up to 24% (the higher rate for residential property gains) on £150,000 less any allowable expenditure.
If you are a higher-rate taxpayer, the bill will be calculated like this:
Gain: £150,000
Less: Tax-free allowance (2024/25): £3,000
= Taxable gain: £147,000
CGT payable (at 24% of £147,000): £35,280
If you are a basic rate taxpayer, you calculate your CGT in this way:
- Work out your total taxable income (i.e. your income minus your income tax personal allowance and other reliefs you are entitled to)
- Work out your total taxable gains
- Deduct your CGT tax-free allowance (£3,000) from your total taxable gains
- Add this amount to your taxable income
- If the amount is within the basic income tax band (£50,000 for 2024/25), you’ll pay 18% CGT. Any amount above £37,700 will be taxable at 24%.
So, if your total taxable income is £25,000, you subtract the £3,000 CGT allowance from your gain of £150,000 – leaving £147,000. You then pay CGT at 18% on the first £25,000 (£50,000-£25,000)(£4,500) and CGT at 24% on the remaining £122,000 (£29,280). This makes a total CGT bill of £33,780.
Have you lived in the property at any point?
Under the current system, you don’t have to pay CGT for the years you lived in a property, nor for the final 18 months you owned the property.
To give an example, if you’ve lived in a property for 12 years, then let it out for the next 6 years, you’ll be able to claim principal private residence (PPR) relief for 13.5 years (12 years + the final 1.5 years or 18 months) or 75% of the time you owned the property. If your taxable gain is once again £150,000, then your chargeable gain will be 25% of that sum – i.e. £37,500. As you can see, it’s a huge saving!
However, from April 2020, the 18-month exemption period will be cut to only 9 months and worse still, there will be a major change to something called lettings relief.
Lettings relief
At the moment, if you sell a property you have lived in and also rented out, you can claim up to £40,000 in lettings relief.
If your chargeable gain is less than this, you can normally claim the full amount.
So, using the example above where the chargeable gain was £37,500, you can then claim up to £40,000 in letting relief to reduce it to NIL – meaning you would pay no CGT at all on the sale. Another huge saving!
However, from April 2020, you can only claim letting relief if you are sharing occupancy of the home with a tenant. This effectively ends the relief for most claimants, so if you’re thinking of selling it is likely to be good idea to do it before the rules change.
Selling via your limited company
If you hold your property via a limited company, you don’t normally pay CGT when you sell it. Instead you pay Corporation Tax. However, if the property is valued at £500,000 or more, you will have to pay ATED-related CGT (ATED stands for Annual Tax on Enveloped Dwellings). It’s a complex area, and one in which you need specialist accountancy advice.
In summary, before you sell a buy-to-let property, be aware that you may have to pay a significant amount of tax on your gains. Always get advice – you may find that it would be a more profitable move to hold on to a property for a number of years.
In the next section, we’ll show you how THP can help you with your whole buy-to-let portfolio.
Next topic How THP can help you as a Landlord
More in this series:
- Making Buy-to-Let More Profitable
- Why Buy-to-Let Incomes are Dropping
- Should I transfer my BTL properties into a limited company?
- Married Landlord? You could reduce your tax bill.
- Strategies for improving Buy-to-Let income
- Personal Buy-to-Let mortgages & re-mortgages – the facts
- Selling your BTL property – things to look out for
- How THP can help you as a Landlord
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How THP can help you as a Landlord
The information included on this page should be regarded as general advice only. You should always seek professional advice tailored to your own specific circumstances before taking any action based upon it.