Selling a property when it isn't your primary residence carries with it some tax obligations you'll need to consider. For buy-to-let landlords, tax can make or break a purchase. It's often the difference between investment success and investment failure, and calculating what you'll need to allow when it comes to selling a buy-to-let property starts when you buy. That's because the amount of stamp duty you pay when you complete a purchase influences the capital gains tax you pay when you sell.
Sound a bit complicated? Well, it sort of is, but we're going to walk through that in this article. You'll also learn about other factors that can affect what you'll need to pay the taxman at the point of sale.
If you made a profit in terms of sale price during your ownership of a buy-to-let property, you'll have to pay CGT when the time comes to sell. CGT can be a little bit costly, but the good news is that you get to deduct several different figures before calculating what you owe. London accountants Accounts and Legal explain what can be deducted:
Firstly, any selling costs get deducted from the sale price. That could be estate agent fees, solicitor and conveyancing charges, and advertising costs.
Secondly, CGT gets based on the post-Stamp Duty Land Tax (SDLT) value of the sale. That essentially means you get to deduct the amount you paid in stamp duty when you purchased the property.
Thirdly, sellers get an allowance before capital gains tax kicks in, and it's separate from your personal income tax allowance. The threshold for individuals is currently £12,300 (for 2020). Once you've reached your allowance, however, you'll need to pay CGT on all profit at either 18% if you're a basic rate taxpayer or 28% if you get taxed at the higher rate.
Capital Gains Tax can amount to substantial amounts, depending on what you're selling, so the tax savings available when you get great advice can be sizable too. It's a point worth reinforcing; remember that a CGT miscalculation can result in one hefty tax bill, payable immediately. Getting agents and solicitor fees correct and accurately calculating selling costs like advertising are vital. However, it also pays to talk to a tax professional about additional ways you can reduce your CGT bill, such as:
Stamp duty on the purchase price.
Using losses made when selling buy-to-let properties in previous tax years.
Any spending on capital items during your ownership. It's essential you get this one right – basically, if you built an extension, that's CGT-deductible, but you claim regular repairs and maintenance against rental income on your tax return.
If the property you're selling used to be your primary residence, you may be entitled to additional CGT relief. It's imperative to have a thorough understanding of the rules regarding Principal Private Residence Relief. You'll need to make sure you elect a main residence legally to qualify for any CGT savings.
You can't carry forward any unused CGT allowance from previous tax years, but it's worthwhile timing a sale so that you get the benefit of your full allowance each tax year. In essence, CGT becomes due when you sell any asset. That could be shares or property, for instance. Selling a lot of what you own within one twelve-month period is likely to incur more CGT.
There are additional ways you can plan for and reduce tax when selling a buy-to-let property, but it's a great idea to get a professional's help if you're going to do that – and well worth the costs involved.
The tax implications of selling a buy-to-let property can get complicated, but the potential for savings gets greater when you find great help. It sometimes seems like the world is against buy-to-let investors – and even tax rules have gotten harder during the last few years. However, buy-to-let isn't dead; you just need to take advantage of savings when they're available – both during and at the end of ownership.
Sound advice during ownership can reap massive tax savings for landlords canny enough to seek it out. Claiming mortgage interest and other lending charges, council taxes or rates, repairs and maintenance, and even insurance all adds up to a lower tax bill. Finding the right estate agent can make all the difference when you're trying to make a buy-to-let investment pay.
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