Ways to Minimize Your Rental Property Taxes

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Selling a buy-to-let property inevitably leads to capital gains tax (CGT). But there’s no need to fret; there are practical ways to reduce this tax burden. You can make the most of your tax-free allowance, explore joint ownership with a spouse, and deduct relevant expenses. Setting up a limited company and investigating private residence relief are also smart moves. Navigating the CGT landscape for buy-to-let properties is essential for minimizing your tax liability.

Given the intricate nature of CGT rules, especially for basic-rate taxpayers who may find themselves in a higher tax bracket, it’s prudent to seek professional tax planning advice. The complexity of these rules cannot be overstated, and that’s why consulting tax professionals is crucial for those aiming to lighten the CGT load when selling buy-to-let property.

Why CGT for Buy-to-Let Property Sales?

When you sell a buy-to-let (BTL) property, you become liable for capital gains tax (CGT) on the profit generated by the sale. This principle mirrors the taxation of other valuable assets such as jewelry, artwork, and shares when they yield a profit. It’s noteworthy that CGT isn’t applicable to the sale of one’s primary residence due to private residence relief.

The protocol for reporting and paying CGT on BTL properties underwent a transformation in April 2020, with further adjustments made on 27 October 2021, extending the deadline from 30 to 60 days. This means sellers must calculate, notify, and settle the CGT owed to HMRC within 60 days of the property sale’s completion—a relatively brief timeframe. Failure to notify HMRC within the same tax year can result in interest and penalties.

To illustrate, if you sold a rental property in March 2020, you had until your 2020/21 tax return was due to report and pay CGT, offering ample time. However, if the property changed hands on 28 October 2021, you should have completed the necessary paperwork and made the payment to HMRC by 27 December 2021. This adjustment significantly reduced the window for fulfilling CGT obligations, compared to the initial legislation of April 2020, which only allowed 30 days.

Calculating CGT on Buy-to-Let Property

For most buy-to-let (BTL) properties, capital gains tax (CGT) applies when you sell them. The CGT rate stands at 28% for higher-rate taxpayers and 18% for basic-rate taxpayers, encompassing any profit accrued from the property’s increased value since purchase.

Basic-rate taxpayers should proceed with caution or consult a tax planning professional, like an accountant, before selling a BTL property. The sale’s profit gets added to your income, potentially pushing you into a higher tax bracket.

Each taxpayer enjoys a tax-free capital gains allowance of £12,300 (2022–23). Consequently, CGT becomes applicable only on gains surpassing this threshold.

Moreover, there are allowable expenses that BTL property owners/sellers can offset. These include stamp duty from the original purchase, solicitor fees related to selling, estate agent fees for the sale, and expenses associated with capital improvements such as extensions, enhancements in energy efficiency, or a new kitchen.

However, costs like property maintenance and mortgage interest payments cannot be deducted from CGT.

Is CGT Imposed When Reinvesting Sale Proceeds?

Even if you reinvest the proceeds from selling your buy-to-let (BTL) property in another property, you remain liable for Capital Gains Tax (CGT). However, CGT isn’t calculated on the entire sale proceeds. Instead, you subtract the property’s purchase price from a decade ago and can offset expenses like solicitor’s and estate agent’s fees, as well as stamp duty.

Alternatively, if you wish to continue property investments while simplifying tax matters, consider channeling your funds into a Real Estate Investment Trust (REIT). REITs are property investment companies designed to emulate direct property investment in the UK.

Operating through an REIT offers benefits such as exemption from corporation tax on rental income and gains from property sales. Additionally, investing in REIT shares can be done within an ISA, potentially making them tax-exempt, subject to ISA limits. This approach can help you navigate CGT and corporation tax issues while avoiding additional layers of taxation associated with investing through a corporate structure.

Tax-Saving Strategies for Landlords

To thrive as a buy-to-let landlord, it’s essential to consider tax efficiency—a factor that often goes overlooked but holds the key to substantial savings. Here are two practical tax-saving strategies for landlords:

1. Establish a Limited Company: While it may require careful planning, setting up a limited company can significantly reduce your tax liability as a landlord. This approach enables property purchases through the company, allowing you to offset costs against profits. Additionally, you can employ yourself or others to manage properties within your portfolio. While this strategy may not suit everyone, it can lead to substantial savings, so consult with your accountant to explore potential benefits.

2. Expand for Greater Returns: Investing in improvements for your existing properties can help you steer clear of hefty stamp duty charges and boost your portfolio’s value. Recent changes in development rights permit more extensive property extensions, potentially increasing your monthly income. However, take into account the area’s price ceiling where your rental is situated to ensure profitability. Be aware that significant improvements may trigger the need for an HMO (House in Multiple Occupation) license if your property houses five or more tenants. Prior to embarking on costly renovations that could alter your property’s status, consult your local council’s licensing rules.

3. Utilize All Available Tax Bands: Consider transferring your assets to your spouse as a strategy to potentially reduce your tax liability. Capital Gains Tax is typically not applicable when assets are transferred between spouses. This approach allows you to take advantage of their lower tax brackets. If their tax bracket is lower than yours, you might also pay less tax on rental income. If the property lacks a mortgage and you don’t gain financially from the transfer, you won’t incur stamp duty either.

4. Optimize Property Value: Regularly reassess your rental property’s value, a step often overlooked but with significant implications for your business. An accurate property assessment determines its actual worth and enhances your position with lenders. If your property’s value increases, your loan-to-value ratio improves, potentially offering more options and better interest rates for your buy-to-let business. If you’re in East London or West Essex, consider consulting valuers to get started.

5. Claim All Allowable Expenses: Ensure you claim all eligible expenses to become a tax-efficient landlord. While being diligent about expenses, keep records of receipts and consult with your tax advisor or accountant to understand what you can and cannot claim. Many landlords could reduce their tax bills by simply being more diligent about tracking expenses. Expenses such as home office costs and letting agent fees can be offset against profits, so take full advantage of these deductions.

6. Consider Short-Term Lets: During tenant transitions or void periods, you can reduce your landlord tax bill by claiming expenses like council tax and utilities. However, instead of solely saving money during these periods, you might want to explore short-term lets to generate income. It’s worth considering this option to keep cash flowing even when your property is vacant. If you’re in East London or West Essex, our lettings team can assist you; give them a call at