Paying tax is an obligation. Paying more tax than you have to is unnecessary. Buy-to-let landlords may feel they have been singled out by the government of late, and it’s hard not to have sympathy with that view. What we’d like to do is help ensure you only pay the tax you have to pay.
When you sell a capital item (such as a property) for more than you paid for it, you have made a capital gain, and capital gains are taxable. You are allowed to make (in the tax year that is about to end) capital gains of £11,100 before you start paying tax. Please note, this £11,100 is an entirely different allowance from the £11,100 allowance on personal income. You don’t get to carry that £11,100 forward, so if you don’t use it, you lose it. For buy-to-let properties, the tax you pay will be either 18% or 28% of the profit, and not the lower rates of 10% and 20% announced in the Budget of March 2016.
But that is 18% or 28% of the net profit – there are items you can set against the gross amount you have made, and it is important landlords know what deductions they are allowed to make, and that they make them all.
The situation becomes a little more complicated if the buy-to-let property was previously your main residence, and you should take professional advice to make sure you don’t pay more than you need to.
The first things to set against the capital gain you have made on selling the property are such costs as stamp duty and fees charged by solicitors and estate agents. Bear in mind that those fees should include the charges you paid when you first bought the property, as well as those incurred when you sold it.
Expenditure on capital items
There’s no relief for things like decorating, but any capital expenditure to improve any of your properties (and not just the one that has been sold) can be set against capital gains before tax is calculated. Building an extension will be an obvious example, but it doesn’t have to be anything that large – remodelling a bathroom with a new shower will qualify. Make sure you retain detailed receipts for every single item you spend money on (both labour and material).
Losses in previous years on other properties
Being a buy-to-let landlord is a business. If you have only ever had one buy-to-let property then, of course, this will not apply. But if you have more than one now, or have had others in the past, then you should consider the total of your buy-to-let investments, and not just the one you have just sold. Did you sell any at a loss? If so, that loss can be set against your current gain before tax is calculated.
Transfers to your spouse, and co-ownership
This option will not be open to you if you hold your buy-to-let properties in the name of the company, but a husband and wife should not forget that each of them is entitled to the full £11,100 CGT allowance. Consider the circumstances of each property and (at present there is no tax on a transfer from one spouse to the other) calculate whether you would be better off by transferring the property before you sell it.
There may be other ways for you to reduce your capital gains tax bill, but the first step should always be to take professional advice. And do it early – there’s nothing worse than finding out how much you could have saved, if only you’d taken action at the right time.
If you're a buy-to-let landlord in need of lettings assistance, get in touch with us today.