If you’re a landlord, or thinking of becoming one in 2021, you need to be aware of capital gains tax.
This guide will help explain everything you need to know about the tax and how it could affect you…
What is capital gains tax?
Capital gains tax is what you pay when you sell something for more than the original price you paid for it.
Things you may be liable for capital gains tax on include:
• Personal possessions with £6,000 or more, but not cars
• Property that’s not your main residence
• Property that is your main residence if it’s used for business, or you’ve previously rented it out
• Shares that aren’t in an ISA or PEP
• Company assets
When do you pay capital gains tax?
Capital gains tax is usually due when you sell something and make a profit on it.
The tax is due on the ‘gain’, which is the difference between what you paid for something and what you sell it for.
So, if you sell an item for £10,000 that you originally purchased for £8,000, you may be liable for capital gains tax on the £2,000 difference.
However, there are exemptions, allowances and relief to factor in when it comes to capital gains tax, which we’ll explain more about later.
Do landlords pay capital gains tax?
Landlords may be liable for capital gains tax if they sell a rental property and make a profit on it.
Homeowners don’t pay capital gains tax on the sale of their main residence, but if that property has previously been let out, they may be liable for some capital gains tax.
How does capital gains tax on property work?
If you sell a property that is your main residence and it hasn’t been used for business or been rented out to a tenant, you won’t pay capital gains tax on any profit from its sale. However, if you’re a landlord selling a rental property, you may be liable for capital gains tax.
The capital gains tax allowance
Each taxpayer in the UK has a capital gains tax allowance.
This is the tax-free amount you can deduct from any ‘gain’ on the sale of your rental property.
The capital gains tax allowances for the 2020-21 tax year are:
• £12,300 for individuals
• £24,600 for couples who are married or in a civil partnership
If you own your rental property alongside your husband, wife or civil partner, you can deduct £24,600 from your ‘gain’ when you sell it.
The UK capital gains tax rates you’ll pay
The capital gains tax rate you’ll pay on the sale of your rental property will depend on which income tax band you fall into.
The UK income tax bands are:
• Personal allowance: You pay no income tax on the first £12,500 of your earnings
• Basic rate: You pay 20% income tax on your earnings between £12,501 and £50,000
• Higher rate: You pay 40% income tax on your earnings between £50,001 and £150,000
• Additional rate: You pay 45% income tax on your earnings above £150,000
Depending on your rate of income tax, the following rates of capital gains tax on property sales will apply to you:
Income tax band
Capital gains tax rate on property
Basic rate (20%)
Higher or additional rate (40% or 45%)
Capital gains tax relief for landlords
Landlords can deduct certain expenses from their capital gains tax bills when selling a rental property.
Costs you can deduct from your capital gains tax bill include:
• Your annual capital gains tax allowance (if not used already)
• Estate agency fees
• Solicitor fees
• Surveyor costs
• The stamp duty you paid when buying the property originally
• The cost of any improvements, such as extensions, conversions or energy efficiency improvements like double glazing
However, you can’t deduct any of the following from your bill:
• Costs of repairing any wear and tear
• Your mortgage interest
Exemptions to capital gains tax
You’ll pay no capital gains tax if:
• The property you’re selling is your main residence
• Your ‘gain’ falls below your annual tax-free allowance and you haven’t used this
• You’re gifting your property to a spouse or civil partner
• Your rental property is owned by a limited company and the company pays corporation tax on its profits
Private Residence Relief
Homeowners pay no capital gains tax on the sale of their main residence – this is known as Private Residence Relief.
While you won’t qualify for full Private Residence Relief when selling a rental property, you may be able to claim partial relief.
Under rules introduced in April 2020, if you previously lived in your rental property and it was your main residence, you can claim capital gains tax relief on gains made during the final nine months you owned the property.
Before April 2020, landlords whose rental property was their previous main residence were able to claim capital gains tax relief on the first £40,000 of their ‘gain’. This is known as Lettings Relief.
However, since April 2020, Lettings Relief is only available to landlords who share their rental property with their tenant – for example, a landlord who lets out a bedroom to a lodger.
Capital gains tax on inherited property
If your rental property was inherited, you may have already paid inheritance tax on it.
However, when you come to sell that property, you may also be subjected to capital gains tax. Your ‘gain’ will be worked out on the difference between the property’s value when you inherited in and the price you’re selling it for.
Costs you incurred when inheriting the property – for example, legal fees – can be deducted alongside other allowable expenses to reduce your final capital gains tax bill.
When do I need to pay my capital gains tax bill?
Since April 2020, however, capital gains tax bills on property sales must be paid within 30 days of the sale completion date.
You’ll also need to complete a capital gains tax return within the same deadline.
If you pay your income tax through an annual self-assessment tax return, you also need to declare your capital gains tax liability in the same way.
Is capital gains tax in Scotland different?
Landlords in Scotland pay the same capital gains tax rates as the rest of the UK.
However, it’s important to note that the rate of capital gains tax you’ll pay in Scotland is calculated using UK income tax bands and not Scottish income tax bands.
Will capital gains tax change in 2021?
With the coronavirus pandemic continuing to hit the public purse, tax changes in the spring 2021 Budget are a distinct possibility.
And this could include amendments to capital gains tax.
While nothing is likely to be confirmed until the spring Budget on March 3, some options open to the Treasury include:
• Removing the capital gains tax allowance completely, or reducing it
• Increasing the rates of capital gains tax
• ‘Equalising’ capital gains tax rates with income tax, meaning basic rate taxpayers pay 20% capital gains tax, those in the higher rate band pay 40% and those in the additional rate band pay 45%
Keeping on top of legislation is key as a landlord – our guide outlines all the changes you can expect in 2021.
And when it comes to tax, it’s not just capital gains tax that you need to be aware of – there are a host of other taxes when you’re a landlord and we’ve outlined everything you need to know here.