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Will Capital Gains Tax on rental property eat up my BTL profits?

November 08, 2023 Reading Time: 4 minutes


East London rents saw an increase of nineteen per cent over the past year, making buy-to-let an ever more tempting prospect for investors. If you are currently weighing the pros and cons of purchasing a rental property, you will probably wonder how much Capital Gains Tax (CGT) you can expect to pay on buy to let.

CGT is a tax payable when you sell a second home or buy-to-let property. As a landlord, you won’t lose any money you earn from rental income. However, this tax can affect your profit on the subsequent sale of your BTL house or apartment.

capital gains tax

What is Capital Gains Tax?

When you dispose of certain assets, including high-cost items like jewellery, paintings and residential property, CGT will be levied on your profits. However, you won’t usually be liable for CGT when selling your main home.

The key word here is ‘profits’ because HMRC is only interested in the capital gain you make on the sale of your property. For instance, you might buy a house for £350,000 and sell it years later for £500,000. The difference in price is £150,000, and under CGT rules, you would be taxed on that amount when you sell.

rental property

How much Capital Gains Tax will I pay on rental property?

It all depends on your current tax category. At the moment, basic rate tax is payable on yearly earnings of between £12,571 and £50,270, while people earning between £50,271 and £125,140 per year are classed as higher rate taxpayers.

If you are a basic rate taxpayer, you can expect to pay 18 per cent Capital Gains Tax on any profit you make when you sell a second home or rental property. However, taxpayers whose earnings put them in a higher bracket will pay 28 per cent.

Capital Gains Tax on rental property

How and when do I need to pay capital gains on my house sale?

The deadline for payment is 60 days after the completion of your property sale. There are several ways to pay, but first, you will need to set up an online account on the HMRC’s government gateway site.

Be aware that you may incur a penalty, with interest charges, if your payment is late.

apital gains on my house sale

How can I avoid capital gains tax on rental property?

Unfortunately, avoiding paying CGT won’t be possible, but there are ways to reduce your tax burden.

Private residence relief: if you have used your rental property as your main residence, you can reduce the amount of CGT you will pay.

There are no legal restrictions on the length of time you live at the property, but you must have nominated it as your main residence, and you should be ready to provide evidence that you have lived there (this includes putting your name on the electoral register).

Use your tax-free allowance: every taxpayer has a tax-free allowance against CGT. Unfortunately, the amount you can deduct has recently been slashed by the government, and it will be further reduced next year.

In the tax year 2022/23, you could have claimed £12,300 off your total CGT bill. This year, it has been cut down to £6,000, and there are plans to reduce it to £3,000 next year (2024/25).

If you are married or in a civil partnership and jointly own the property, you can reduce your tax liability by combining both allowances. The combined allowance is currently £12,000, but be aware that it will be reduced after April 2024.

Allowable deductions: you can cut down your CGT bill by factoring in costs related to the property sale, as well as money you have spent on certain home improvements.

Eligible sale costs include Stamp Duty, solicitors’ fees, survey costs and estate agent fees. If you have improved the property in ways that go beyond basic repair and maintenance – for instance, by building an extension or carrying out a loft conversion – those costs can also be deducted.

Sell at the right time: try to avoid selling your property at the same time as disposing of other high-value assets. It’s better to spread out your gains by selling valuable assets over different tax years.

Become a limited company: if you are a higher-rate taxpayer, it may benefit you to operate as a buy-to-let business. That means the gain will be liable for corporation tax of 19 per cent instead of CGT of 28 per cent. However, there are many financial implications to starting a business, so make sure you get the right professional advice before going ahead.

Next steps

As leading Barkingside and Ilford estate agents, we’re always happy to advise buyers considering a buy-to-let purchase.
If you’d like expert help navigating the busy East London lettings market, don’t hesitate to contact us.

Give us a call at 0203 972 7341 or email

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