Capital Gains Tax for rental properties: a summary guide

Working out what tax you need to be paying when renting out a property can be a bit of a nightmare. Capital gains is one of the key taxes landlords need to be aware of, so we’ll take you through everything you need to know about it.

What is Capital Gains Tax?

You have to pay Capital Gains Tax if you have made a profit when you sell (or “dispose of”) a property or piece of land that is not your home. This includes buy-to-let or other rental properties, business premises, land, a property that you’ve inherited, or anything like that.

Disposing of an asset includes:

  • Selling it
  • Giving it away as a gift
  • Transferring ownership to someone else
  • Trading it for something else
  • Receiving compensation for it - such as an insurance pay out if it has been destroyed

In order to work out how much you pay in Capital Gains Tax you need to know your “gain” (the profit you’ve made on the property). Read on for an explanation of how to calculate the amount of Capital Gains Tax you’ll need to pay.

Capital Gains Tax exemptions, deductions and relief

There are a few circumstances where you might be exempt from paying Capital Gains Tax, or be entitled to a deduction or relief.

Under most circumstances you wouldn’t pay Capital Gains Tax if you are gifting your property to your spouse or civil partner, or if you’re gifting it to a charity.

If your property is a business asset - if you buy and sell properties as part of your business, for example - then you may get tax relief or pay income or corporation tax instead.

You may also be entitled to relief if a dependant relative has been living in your property.

For further information about eligibility for exemptions, deductions and relief from Capital Gains Tax, check out the government’s website.

Calculating your gain

Ordinarily, your gain will be the difference between what you paid for the property and what you sold it for. So if you bought a house for £275,000 and then sold it for £310,000, your gain would be £35,000.

In some circumstances, instead of using the sale price to calculate your gain, you’ll use the market value of the property. This could be if:

  • You sold the property at a lower price to help the buyer
  • You inherited the property and don’t know the Inheritance Tax value
  • You became the owner of the property before April 1982

If you’re selling part of the land rather the whole property, or the property is being purchased compulsorily, then there are different rules.

Once you’ve calculated your gain, you can deduct the costs of buying, selling or improving your property. These costs can include:

  • Estate agents’ and solicitors’ fees
  • The cost of improvement works, such as building an extension (decorating counts as ‘normal maintenance’)

Calculating how much Capital Gains Tax you owe

The tax free allowance for capital gains is £11,000, or £5,500 for a trust. If your gain is above this then the remaining amount will be taxable.

The amount of Capital Gains Tax you owe will depend on your income tax rate, which you can use to calculate how much you’ll pay. Additionally, you must notify HMRC of your house sale, after which they will respond with a bill.

How to notify HMRC and pay

Once you know your gain and have established that it is above £11,000, you can report your gain to HMRC in your self assessment tax return.

If you don’t ordinarily complete a self assessment tax return then you will need to register for self assessment by 5th October of the year that you disposed of your assets.

In your self assessment you need to include your calculations for your gain, including any deductions and any reliefs you’re entitled to. After HMRC contact you with the amount due, you need to pay the tax by the deadline.

Changes to Capital Gains Tax 2016

There was a cut to Capital Gains Tax in the 2016 budget, but properties were left out and are now effectively subject to an 8 per cent surcharge. If you want to know more you can read our 2016 guide to buy-to-let changes.

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