Selling property that isn’t your main residence? Whether you’re a first-time buy-to-let landlord or a budding property investor, selling property that isn’t your primary home can open you up to a hefty Capital Gains Tax bill.
Sitting at your desk with a pile of receipts and a calculator isn’t the most glamorous aspect of building a thriving property business. But if you want to make your property investments work harder for you (and not the other way around), then knowing what you can deduct will help you save money.
As a landlord or property investor, you can reduce the Capital Gains Tax you have to pay by deducting certain buying and selling costs from the sale price. This can include solicitor fees, Stamp Duty and estate agent fees. You can also make deductions for improvements, such as adding a new kitchen.
Throughout this blog, we help you understand how Capital Gains Tax works when you sell a property and what you can do to make sure your bank account doesn’t take the hit. We’ll cover some smart tax-saving tactics you can use to reduce your CGT liability and increase your profits.
If you’ve invested in property and want to speak to a property accountant to make sure you’re on the right track, then don’t hesitate to get in touch with Guildford Accounting today. We understand the property business is fast-paced, so we’ll happily find a time and arrangement that suits you, whether that’s in-person or online.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a pricy fee that investors must pay when they sell certain assets, like second homes or rental property, shares, business assets and most other personal possessions that are worth over £6,000.
For property owners, this means you may have to pay CGT on the property you sell.
However you choose to ‘dispose of’ the property, you’ll have to pay CGT. HMRC’s definition of disposal includes selling the property, receiving any form of compensation, gifting it or swapping it for something else.
Who has to pay Capital Gains Tax?
If you’re a landlord or property investor or own more than one property that isn’t your primary home, you may be liable to pay Capital Gains Tax when you come to sell the property. This includes buy-to-let property, Airbnb rentals, second homes and holiday homes or properties used solely for business.
If you gain property through inheritance, you won’t be expected to pay Capital Gains Tax straight away. Instead, you will only be liable when you come to sell the property.
How does Capital Gains Tax apply to property sales?
When you come to sell a property that isn’t your main home and has increased in value since the date you purchased it, then this is known as a gain. You’ll have specific financial obligations to consider, like Capital Gains Tax.
Everyone is entitled to a Capital Gains Tax allowance, which is a tax-free amount of up to £3,000 (2024).
How is Capital Gains Tax calculated on property?
Woking out your Capital Gains Tax liability is fairly straightforward. It involves deducting the amount you paid for a property from the amount you sell it for. The final figure is known as your taxable gain – this is what you pay tax on.
For example, let’s say you purchased a rental property for £250,000. Then, when you came to sell the property, the value increased to £300,000. Your taxable gain would be £50,000.
Unless you qualify for any exemptions (which we’ll get on to next), you’ll have to report the gain to HMRC and pay CGT on the profits. This counts for both commercial and residential property. The CGT rate will vary depending on which Income Tax band you fall into.
There are also allowable deductions you can consider to reduce the overall bill.
What if you qualify for Private Residence Relief?
Private Residence Relief (PRR) is one of the exemptions we mentioned. It applies to individuals who buy their homes with the simple intention of living in them and not making a profit.
Private Residence Relief completely excludes you from paying any Capital Gains Tax!
You can claim Private Residence Relief if:
- You only have one home and have lived there the entire time.
- You didn’t buy the property to make a profit.
- You have not let out any of the property or used it solely for business purposes – working from home temporarily doesn’t count.
- The grounds and all buildings must also be under 5,000 square meters.
However, if you previously lived in a property that you now rent out or use as a business premises, you may qualify for partial Private Residence Relief. This can still significantly reduce the capital gain.
Capital Gains Tax and the exemptions around it often change. It’s always best to check the government’s guidelines or contact an accountant who knows what they’re talking about.
What deductions can I claim on Capital Gains Tax?
In addition to your annual exemption and the option to claim PRR, there are specific deductions you can claim to help lower your Capital Gains Tax bill and keep more money in your pocket.
Purchase costs and sale costs
When you buy a house, the fees and other associated costs soon add up. And it’s the same when you come to sell it. This can include Stamp Duty, legal fees, estate agent fees, surveyor fees and even advertising fees. By deducting these costs from your bill, you can reduce the total amount of tax you have to pay.
Improvement costs
If you’ve made improvements to the property, like renovating the kitchen or building an extension, these will likely increase its value. If that’s the case, you can deduct these costs from the sale price.
Allowable losses
Not all properties make a profit, unfortunately. But the silver lining is that if you’ve taken a hit on other property investments within the tax year, those losses can usually be offset against your gains. You may also be able to claim unused losses from previous years to reduce your CGT bill further. Previous losses must be reported to HMRC within 4 years of the property sale.
Do I need receipts for Capital Gains Tax on property?
Receipts are one form of evidence you can use to show HMRC the improvements and costs associated with buying property. We highly recommend keeping receipts, but you should also keep hold of other important documents to support a claim further. Bank statements, invoices, bills and contracts are also important when calculating CGT.
HMRC will expect you to keep records for a minimum of 6 years after filing your tax return.
Are you looking for an accountant who understands property? Contact us
Claiming deductions is a smart way to increase your profits, but we know it takes time and a deep understanding of tax regulations. It’s not the easiest task.
That’s why we specialise in property accounting for landlords. Guildford Accounting has always been committed to reducing the financial stress for landlords, property investors and individuals. We provide tailored accounting solutions that work for your property business, from taking care of the everyday admin to helping you make significant Capital Gains Tax savings. We pride ourselves on our reliable, friendly and transparent service.
If you’re gearing up to sell a property and need some support, our property accountants are ready to step in. Speak to Guildford Accounting today, and let’s see what we can do to reduce your tax liability.
Frequently asked questions about CGT on property sales
How is Income Tax different from Capital Gains Tax?
For landlords and property investors, you have to pay Income Tax on any revenue you make throughout the year. This can include rental income from your property business, as well as any other salary you might receive. Capital Gains Tax only applies to the profit you make from selling an asset, such as property.
Can I also reduce my Income Tax bill as a property investor?
You can reduce your Income Tax liability for your property rental business in various ways, such as changing the ownership structure to be more tax efficient, using all allowable expenses and searching for suitable Income Tax relief.
Reducing your Income Tax liability can provide you with better cash flow and savings, helping you prepare for future investments, like buying and selling property.
