Tax-efficient ways landlords can sell buy-to-lets

Higher mortgage rates and new regulations such as energy efficiency requirements are encouraging more buy-to-let landlords to consider selling up. Or maybe you just don't want to spend a lot of your retirement managing and maintaining rental properties. But selling a property that isn't your main home also incurs capital gains tax (CGT), and at a higher rate than for the disposal of assets such as funds and shares – 18 per cent for basic rate taxpayers or 28 per cent for higher or additional rate taxpayers, respectively, as opposed to 10 per cent or 20 per cent.

On top of this, the annual CGT allowance of £6,000 – the value of gains you can make tax-free – will fall to £3,000 from the 2024-25 tax year. So if you sell a rental or second property, you should be conscious of how the tax might affect you.

When calculating the amount of CGT due, work out the difference between what you spent on the property and the sale price. If you made a profit, you can deduct expenses associated with acquiring and selling the property. These include fees paid to surveyors, valuers, auctioneers, accountants, estate agents and legal advisers; the costs of transfer or conveyance including stamp duty and stamp duty land tax; the costs of advertising for buyers or sellers and costs reasonably incurred in making a valuation or apportionment for the CGT calculation.

If you improved or extended the property during the period that you owned it – for example, added a loft conversion or garage – you can also add this to your CGT base cost. But normal maintenance costs, such as decorating or the installation of a replacement kitchen, are unlikely to count, unless the property was effectively derelict at acquisition. “If it is simply a replacement, it wouldn’t be allowable unless the replacement is of a far superior standard and much higher cost than a like-for-like replacement,” says Paul Webster, private client tax director at Kreston Reeves. "Instead, this would be likely deemed to be revenue in nature and admissible against gross rents if the property is let.”

You could also offset capital losses sustained on sales of other assets held outside tax-efficient wrappers such as individual savings accounts (Isas) and pensions against the gain on the property. So if you hold other assets at a loss you could realise them to crystallise this loss – as long as this fits in with your investment objectives. “The loss needs to arise in the current or previous tax year to be deductible,” adds Christopher Springett, partner in private client tax at Evelyn Partners. “It isn’t possible to carry the loss back to a preceding tax year.”

He also suggests looking to sell the property during a tax year when you have not sold other assets at a gain, so that your full CGT exemption is available. In particular, if the date of the property disposal is likely to fall around the tax year end, consider accelerating or delaying the date of exchange as appropriate. “For example, if the vendor is self-employed and has profits of £10,000 in one tax year and £60,000 in the other, it would be tax efficient to try to ensure that the disposal falls within the year with the £10,000 profit,” says Webster. “This is because more of the basic rate band will be available to offset against the gain in that year, ie more tax at 18 per cent rather than 28 per cent.”

What's more, if you are a higher rate taxpayer you can potentially lower your tax band via a pension contribution or donation to charity via gift aid.

The benefits of joint ownership

If you have ever lived in the rental property that you are selling you might be able to reduce some of the chargeable gain by claiming principal private residence (PPR) relief, which reduces the chargeable gain by the proportion of time a property was occupied by you as your main residence. For example, if you lived in the property for 10 out of 20 years of ownership, roughly half of the gain would be exempt. “For the purposes of this relief, the last nine months of ownership is always deemed to be a period of occupation, although this period may be as high as 36 months in some circumstances,” adds Aysha Marley, tax director at RSM UK.

However, spouses and civil partners are viewed as a single person for the purposes of PPR relief, so may only have one PPR between them.

Joint ownership of a property with a spouse or civil partner means that you could use both of your annual CGT allowances when you sell the property. You can transfer property to a spouse without incurring CGT, although there might be a charge to Stamp Duty Land Tax, if the recipient will be taking on the mortgage. And if you own a property jointly with a spouse, the rental income is shared between the parties in accordance with their beneficial ownership, which could result in a higher or lower income tax bill, depending on your spouse's tax band. “Therefore, any potential CGT saving may be outweighed by other increased tax charges,” cautions Marley.

If a transfer of a share in a property is made to a spouse who has their basic rate band available, so that they pay a proportion of any gain at 18 per cent, HM Revenue & Customs (HMRC) may argue that there has not been a genuine transfer of beneficial ownership and that the gain remains with the transferring spouse. “[So] “if you are looking to maximise allowances and rate bands ahead of a sale, it would be prudent to ensure that the transfer is made at the earliest possible juncture and the correct procedures have been followed to evidence the variation in beneficial ownership," says Webster. "Without the requisite steps having been taken, HMRC would presume that the property is owned by spouses as joint tenants (i.e. 50 per cent interest each).

A residential property can be passed through a trust without incurring a CGT liability because of holdover relief. “The relief allows any gain arising on the transfer of chargeable assets into trust to be deferred by the transferor,” explains Webster. “The recipient trustees then effectively take on the transferor’s gain by taking on their original cost. A further deferral can then be made when the property is passed out to the intended beneficial recipient of the asset.”

However, to avoid a lifetime inheritance tax (IHT) charge, a married couple could not transfer in property with a value over their combined nil-rate bands of £650,000-£662,000 if they also have annual exemptions available. A lifetime IHT charge is 20 per cent of the value exceeding the nil rate band but this rises to 25 per cent where the person transferring into trust pays the tax, rather than the recipient trustees. “For example, if an unmarried individual transfers a property worth £500,000 to a discretionary trust, the trustees would be liable to £35,000 in lifetime IHT (or £43,750 if the settlor pays),” explains Webster.

Other costs to watch out for when selling a buy-to-let property

If you gift or sell a property at under market value, the gift is a ‘potentially exempt transfer’ for IHT purposes. That means if you live for seven years after making it there is no IHT due. But if you die within this period your estate may be liable for the tax if the gift is not covered by your allowances.

You have to report disposals of UK residential property on which there is CGT due and pay it within 60 days of completion of the sale. Failure to do this in time and correctly could result in a late filing penalty and interest charges, so have readily available funds to pay the tax.