According to the UK Landlord Report produced by Simply Business, landlords and tenants are feeling the effects of rising costs.

The research found that almost half of landlords had sold a property in the last year or are planning to do so, which “comes as little surprise when you consider the pace of market change, as well as tax disincentives such as Section 24 and the stamp duty surcharge”.

Selling a residential property comes with tax obligations, namely capital gains tax, however, there are ways by which you can mitigate your tax bill.

Capital gains tax

Capital gains tax is the tax on the profit that you make when you sell (or ‘dispose of’) certain assets and property that has increased in value from when you first acquired it.

Capital gains tax is paid on the disposal of:

• most personal possessions worth £6,000 or more, apart from your car and other ‘wasting’ assets
• property that is not your main home
• your main home if you’ve let it out, used part of it exclusively for business, or it is above 5,000 square metres in total
• any shares that are not in an ISA or PEP
• business assets.

Capital gains tax on residential property

Landlords who invest in property to take advantage of house price growth will almost certainly be subject to capital gains tax.

You pay a different rate of tax on gains from residential property than you do on most other assets.

If you’re a higher-rate or additional-rate taxpayer, you’ll pay 28% on your gains from residential property and 20% on your gains from other chargeable assets.

If you’re a basic-rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and, again, whether your gain is from residential property or other assets.

If you have gains from both residential property and other assets, you can use your annual exempt amount against the gains that would be charged at the highest rates first.

The annual exempt amount for capital gains is £12,300 for the 2022/23 tax year, and you are entitled to an annual exempt amount each year. So planning your asset or property disposals over the long term is important in order to save tax.

You must report and pay any capital gains tax on most sales of UK residential property within 60 days.

CGT deductions for landlords

Luckily for landlords, there are ways to reduce a capital gains tax bill.

First, the amount of capital gains tax payable will reduce if, at any time during the ownership of the property, the landlord lived there themselves.

If you lived in a property and then moved out to let the property, you can claim private residence relief for the time you lived there, plus the last nine months you owned the property.

If you lived in your home at the same as your tenants, you might qualify for letting relief on gains you make when you sell the property.

The lettings relief you receive is the lower of:

• the amount you got in private residence relief
• £40,000, and
• the amount of the chargeable gain you made while letting out part of your home.

Letting relief does not cover any proportion of the chargeable gain you make while your home is empty.

If you purchased a property with multiple people, you won’t pay the same amount of tax as you would have if you purchased it alone, as the annual exempt amount of all the buyers is applied to the gain.

Landlords can also save money by claiming the cost of improvements to their properties as a tax-deductible capital expense. Improvements can be anything from installing cavity wall insulation to building an extension.

In most cases, landlords will have already deducted many of the expenses maintaining their property when completing their annual tax return. If there are other expenses these may be allowable expenses to set against the capital gains tax when the property is sold. This also applies to fees associated with buying and selling a property, such as those related to surveyor inspections, solicitors, buy-to-let mortgage brokers, stamp duty and estate agents. Talk to us about tax payable on the sale of your property.