Working out what tax you need to be paying when renting out a property can be a bit of a nightmare. capital gains tax 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.
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:
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.
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.
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:
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:
The tax free allowance for capital gains is £12,000, or £6,000 for a trust, for the 2019-20 tax year (and £11,700, or £5,850 for a trust for 2018-19). 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.
HMRC has built a dedicated calculator for working out capital gains tax liabilities on property. Use the calculator here.
Once you know your gain and have established that it is above £12,000 (or £11,700 for 2018-19), 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.
There was a cut to capital gains tax in the 2016 budget, though this didn't include properties, which are now effectively subject to an 8 per cent surcharge. Check out our Knowledge Centre for the latest news on buy to let changes.
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