What taxes do I pay when I sell a rental property?

New research shows property prices along the London Marathon route have jumped by an average of 16% in just 12 months.

This has prompted an increasing number of landlords to cash in on the rising value of London property. But Belgravia estate agent Best Gapp warns that landlords selling rental property could be subject to Capital Gains tax when they sell a rental property.

Here, we run through the tax payable when selling a rental property in London.

Capital Gains Tax

What taxes do I pay when I sell a rental propertyCapital Gains Tax is payable on the profit earned on a property that is not your primary residence. If you are gifting the property to a husband, wife, civil partner or charity, however, you are not liable to CGT.

Everyone is entitled to tax-free capital gains, worth £11,100 in the 2016/17 tax year. Only gains above this amount are taxed.

The taxman also allows vendors to deduct both buying and selling costs from the amount of property profit liable for CGT. This includes estate agent and legal fees plus any stamp duty paid at the time of the property purchase.

Other allowable deductions from the amount of property profit liable for CGT include the cost of any improvement works carried out – on the condition those renovations are reflected in the property at the date of disposal.

If in the unlikely event a landlord has added a ground floor extension to a rental property but has then demolished it in order to restore the garden to its original dimensions, the cost of the extension cannot be used to reduce the CGT bill.

It is also worth noting that the cost of decoration or other cosmetic work cannot be used to reduce CGT liabilities.

What rate?

CGT is currently charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. This is only payable on any profit earned on the property minus a landlord’s £11,100 CGT Allowance and other reliefs available.

Tax specialists point out that CGT is only charged at 18% on the amount a seller has available in the basic rate band (£11,000 to £43,000).

Given the huge gains in value that property in London and south-east England has made over the past two decades, the majority gains from property end up taxed at 28% even if the landlord pays income tax at the basic rate.

The CGT rate landlords pay depends on the size of the gain and not what income tax band they are in.

3 types of tax relief

It is worth bearing in mind that CGT relief is available if the property was a business asset or occupied by a dependent relative.

Three other reliefs are available if the owner has lived in the rental property for any length of time.

1 Private Residence Relief is available for the time an owner lived in the property. This period of time is tax-free. Further PRR can be available for periods of time spent working away. The HMRC’s Guidance Notes on PRR also state: “Your period of ownership begins on the date you first acquired the dwelling house, or on 31 March 1982 if that is later. It ends when you dispose of it.”

2 Letting Relief is available if a landlord was subject to tax on the property’s rental income. Lettings Relief can reduce taxable gains by up to a maximum of £40,000 per owner. If the rental property has two owners, up to £80,000 Letting Relief is available. But beware that the HMRC forbids landlords selling a rental property to claim more Letting Relief than Private Residence Relief.

3 Final Period Exemption means the final 18 months of a rental property’s period of ownership always qualify for CGT relief, regardless of how an owner uses the property in that time – as long as it has been your only or main residence at some point.

How to calculate your CGT bill

What taxes do I pay when I sell a rental property 1Market value of property – (Amount paid + improvement, buying and selling costs) = Profit

(Profit – CGT Allowance and other reliefs) x 18% or 28% = CGT to pay

Please note that owners of rental properties in Belgravia who are non-resident in the UK will only pay CGT on the gain made on the property since 5 April 2015.

It should also be remembered that the HMRC will not reduce its CGT demand if the property is sold for less than its market value.

Other taxes

When selling a rental property, the fees charged by estate agents, legal representatives and any other third parties involved in the sale will be subject to VAT, which is currently charged at 20%.

The good news is Stamp Duty Land Tax is not payable by vendors. Only purchasers pay SDLT, and anyone buying a second home in London has to pay an additional 3% surcharge in addition to the fee paid by purchasers of a primary home.

The content of this article is for general information only and doesn’t constitute professional advice. Anyone acting on this information does so at their own risk and Property Division does not accept any liability. This is why Property Division recommends anybody selling rental property to seek tax advice from a suitably qualified professional.