Capital Gains Tax on UK BTL Property: A CGT Guide

Understanding your tax liabilities is key to successfully investing in buy to let property – especially when it’s time to sell or settle your interest-only BTL mortgage. Here’s a practical guide to Capital Gains Tax (CGT) for BTL investors in the UK from leading BTL mortgage providers.

Please be aware that this guide has been produced for informational purposes only and not as tax advice. If you need tax advice, please get in touch with a qualified tax specialist.

What is Capital Gains Tax (CGT) on BTL property in the U.K?

Capital Gains Tax is charged on the profit made during the sale of an asset. For BTL investment property, the profit is the difference between the purchase price and how much you sell it for. How much CGT you must pay is determined by your personal income, and therefore which income tax band you fall into.

In some circumstances, you do not need to pay capital gains tax. For example, CGT does not apply if you inherit a second home or gift within the threshold to your spouse, civil partner, or a charitable organisation. You may also not need to pay CGT if a dependent relative occupied the property.

Must Capital Gains Tax only be paid on buy to let properties?

No. Capital Gains Tax is applicable to several different types of assets including:

• Business assets
• Personal assets worth over £6,000 (not including motor vehicles)
• Shares and investments (not including ISAs and PEPs)
• Property that is not your main residence
• Property that is let out to commercial or residential tenants

However, the rate of CGT payable is higher on property assets than on other assets at 18% (10% for non-=property assets) for basic rate tax payers and 28% (20%) for higher rate tax payers.

Types of properties where CGT must be paid

CGT is applicable to the sale of all properties that are not your main residence. This includes:

• BTL residential properties held in a personal name*
• BTL commercial properties held in a personal name*
• Land
• Second homes
• Holiday homes

*Profits earned from properties owned in a Limited Company structure are subject to Corporation Tax, rather than Capital Gains Tax.

How much is Capital Gains Tax?

To work out how much Capital Gains Tax you owe, you need to first work out your gain from selling your BTL property. Generally, you can work this out by subtracting what you paid for the property when it was first bought, from the property’s current market value.

For example, if you bought your BTL property for £90,000 and sold it for £250,000, the formula will be:

£250,000 (selling price) - £90,000 (purchase price) = £160,000 (net profit)

If you haven’t sold your property yet but want to determine how much the Capital Gains Tax may be on the sale, it’s best to use market value for your property. You can get this by having a property evaluation performed by an estate agent.

However, CGT is not always a simple calculation or as straightforward as calculating the gain in the value of your BTL property. Other factors influence the amount you must pay, including:

• Capital gains relief
• Differing rates for CGT on BTL properties
• Private residence relief
• Lettings relief
• The Capital Gains Tax allowance, which is currently set at £12,300

You will also be able to subtract the following:

• Estate agent and solicitor/conveyancing fees
• Stamp Duty Land Tax (amount paid at the point of original purchase)
• Costs of home improvement and expansion

You cannot deduct expenses such as costs for maintaining your property or mortgage interest on your BTL mortgage.

• For example, suppose you purchased a property for £90,000 in January 2000, spending £2,500 in purchasing fees. 
• Since then, you’ve also spent £50,000 on improvements and repairs. In June 2020, you sold it for £250,000, spending £5,500 in solicitor, conveyancing, estate agency and other qualifying fees. 
• In this case, the gain that is subject to CGT rules is £102,000, of which £12,300 is CGT free as an annual allowance.
• CGT on property assets is payable at 18% for basic rate tax payers and 28% for higher rate tax payers.

You may also qualify for relief if the property was:

• A business asset
• Occupied by a relative who was dependant on you
• Gifted to you

Capital gains allowance 

The current capital gains allowance is set at £12,300 per person. This means that you pay zero CGT on the first £12,300 of profit that you make on the sale of your BTL property. If two people own the property, this allowance is doubled to £24,600, so you will only pay CGT on a percentage of the profit above £24,600.

What are the Capital Gains Tax rates?

In the UK, Capital Gains Tax is applied on a banded system based on your income tax rate for your tax band. Your taxable gains are added to your personal income in the same tax year to determine which tax band you fall into.

 

Income Tax Band	Taxable Income for 2020 - 2021	Income Tax Rate for 2020 - 2021
Personal Allowance	£12,570	0%
Basic Rate	£12,571 - £50,270	20%
Higher Rate	£50,271 - £150,000	40%
Additional Rate	£150,001 and over	45%

 

Taxable Gains on Property for 2021 - 2022	Capital Gains Tax Rate on for Property 2021 - 2022
£12,300	0%
£12,301 - £50,270	18%
£50,271 and over	28%

 

The interaction of these is complex – but essentially if your personal income in the tax year is less than your Basic Rate limit (currently £50,270 for most tax payers) – then the unutilised portion of your income tax Basic Rate band can be utilised for allocating part of your gain (after deducting the tax free allowance of £12,300) to paying the lower rate of CGT (18%), with the rest of the gain taxed at the higher rate of 28%.

We strongly recommend that you seek professional advice on how to calculate the CGT.

If you make a loss when selling the property, you will not have to pay Capital Gains Tax. These are known as allowable losses and are deducted from your profit when your taxable gains are worked out. If they are greater than the CGT allowance (£12,300 for 2020-2021), these losses must be reported to the HMRC in your Self-Assessment tax return. If these losses are less than the CGT allowance, they do not need to be reported. Losses can be carried forward into the next tax year, but it is best to speak to your tax accountant on how to do this properly.

How does letting relief work?

Homeowners who sell their primary residence do not pay CTG and get private residence relief. However, this does not apply to BTL properties as they are not primary residence.

However, if you are selling a property that is your main residence as well as a source of rental income, you may qualify for letting relief as well as private residence relief. This means that the gains over the last 9 months (this has been reduced from 18 months) qualify for full private residence relief (you pay no CGT on this portion of the gain) in addition to paying no CGT on the sale of the property for the years you have lived in it because this period would qualify for private residence relief as your main residence. 

As per current tax legislation, this only applies to properties where the owner of the property is in shared occupancy with the tenant and does not apply if you have a lodger that shares living space with you or if you have children or parents living with you who pay rent or housekeeping.

If you only let out a portion of your home, you will qualify for private residence relief on the portion you are not letting out. For example, if you let out 40% of your home, then you will not have to pay CGT on 60% of the sale price. You will also get lettings relief if you lived in the property at the time. According to legislation, you will get the lowest sum of the following when you sell your property, which will be:

• The same amount you received in private residence relief
• The same amount as the gain you made while letting out the property
• £40,000

Is there capital gains tax on inherited property?

No CGT is applicable to inherited commercial or residential property. In addition, you will not have to pay Stamp Duty or Income Tax on this property. However, you may have to pay Inheritance Tax on the property if it has not been paid by the deceased’s estate. If Inheritance tax is applicable, the HMRC will contact you to settle this cost.

Keep in mind that if you become the owner of a second property as part of an inheritance, you will have to state which residence is your main residence. This will determine CGT should you decide to sell the property.

How do I pay Capital Gains Tax to the HMRC?

It is a simple process to pay your CGT to the HMRC, and you can perform this yourself or through your accountant. The most important factor is to report your taxable gains accurately in order to avoid penalties. If your taxable gains are below the CTG allowance, which is currently set at £12,300, you do not need to report them.

If they are above this allowance, it needs to be reported via the HMRC’s CGT service portal or annually in your self-assessment tax return. Generally, this needs to be paid within 30 days.

 

 

2nd March 2022