How does Capital Gains Tax work on rental properties in the UK?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of an asset- such as a rental property- that has increased in value.

In the UK, if you sell a rental property that has increased in value since you purchased it, you may be liable to pay CGT. While there are exemptions and reliefs available to limit your CGT liability, it is essential to understand how CGT on rental properties works and how to calculate your taxable gain correctly.

This article will guide you through the basic concepts of CGT on rental properties in the UK, the calculation of CGT liability, and the available exemptions and reliefs to help minimize your CGT bill.

Understanding the basics of CGT

CGT is a tax on the profit you make when you sell an asset that has increased in value. The tax is calculated on the difference between what you paid for the asset (known as the ‘base cost’) and the amount you sell it for.

CGT applies to a wide range of assets, including second homes, rental properties, stocks and shares, and valuable possessions like artwork and antiques. However, certain assets, like your main home, are exempt from CGT.

The amount of CGT you pay depends on your income and the amount of the gain you make on the sale. If you are a basic-rate taxpayer, you will pay CGT at a rate of 18% on gains up to £50,570 and 28% on gains above this threshold. If you are a higher-rate taxpayer, you will pay 28% on all gains.

When you sell a rental property, you will need to pay CGT on any profit you make. In general, the same CGT rates apply to rental properties as they do to other assets. However, there are some reliefs and exemptions that can reduce your CGT liability, which we will discuss in more detail later in this article.

How to determine the CGT liability on selling a rental property

To calculate your CGT liability, you first need to work out the value of your rental property when you bought it and how much you spent on improvements over the years. This will give you your ‘base cost’ for CGT purposes.

Next, you need to work out how much you sold the property for and subtract your base cost to calculate your taxable gain. If you have made a loss on the sale, you can use this to offset gains on other assets or carry it forward to offset future gains.

Finally, you can deduct any allowable expenses from your taxable gain to reduce your CGT liability. Allowable expenses include legal fees, estate agent fees, and the cost of improving the property. However, you cannot deduct general maintenance or running costs from your taxable gain.

Exemptions and reliefs available for CGT on rental properties

If you have lived in the rental property as your main home at any point, you may be able to claim PPR. This relief exempts you from paying CGT on the proportion of time that you have lived in the property, as well as the last 18 months of ownership.

Lettings Relief is another relief available to landlords who have lived in the property as their main home at some point. This relief can offset up to £40,000 of your CGT liability.

Everyone has an annual CGT allowance of £12,300, which means you can make gains up to this amount each year without paying any CGT. This is a valuable exemption to use when selling a rental property.

Business Asset Disposal Relief, previously known as Entrepreneurs' Relief, a relief available for business owners who sell their business or business assets. If you have used your rental property as part of your business, you may be able to claim Entrepreneurs’ Relief, which reduces the CGT rate to 10%.

Reporting and paying CGT to HMRC

When you sell a rental property, you are required to report to HMRC and pay any CGT owed to HMRC within 60 days of completing the sale. Failure to do so can result in penalties and interest charges.

The amount you owe in penalties will depend on the length of time between the due date and the date you finally settle the debt.

6. Strategies to minimize CGT liability on rental properties

If you have other rental properties or investments, you can offset the CGT owed on the sale of one property against any losses made on another. You can also spread the gain over multiple tax years, using your annual CGT allowance.

Transferring ownership of the rental property to a spouse or civil partner can help to reduce your CGT liability. If the property is held jointly, you can both use your annual CGT allowance to reduce the overall tax owed.

If you use the gains from the sale of a rental property to reinvest in another, you may be able to defer paying CGT. This is known as Business Asset Rollover relief, and it can only be used if the new property is bought within a specified time period.

7. Other CGT considerations - gifting and non-residents

If you gift a rental property to someone else, you will still be liable for CGT on any gain made up until the point of transfer. The person who receives the gift will be liable for any CGT owed on any gain they make when they eventually sell the property.

Non-UK residents are required to pay CGT on any gains made on the sale of UK property, including rental properties. The rules and rates are the same as those for UK residents.

You do not have to pay CGT if you sell a rental property at a loss. However, you can use the loss to offset any gains made on other rental properties or investments.