Capital gains tax - losses and deductions

Many landlords invest in property for long-term gains. Profits from the disposal of rental properties are subject to tax, but it is possible to offset certain costs in order to reduce your tax exposure.

Capital gains tax (CGT) is payable if you make a profit on the sale of a chargeable asset. It is levied at the following rates:

For gains made before 6 April 2016

  • At 18% for basic-rate taxpayers
  • At 28% for higher-rate taxpayers and trustees

For gains made on residential property on or after 6 April 2016

  • At 18% for basic-rate taxpayers
  • At 28% for higher-rate taxpayers and trustees

For gains made on other chargeable assets on or after 6 April 2016

  • At 10% for basic-rate taxpayers
  • At 20% for higher-rate taxpayers and trustees

The rate you pay depends upon your total taxable income for the tax year. A tax-free capital gains allowance, which is currently £11,100 (or £5,550 for trustees, unless the beneficiary is disabled), also applies.

Example: A landlord sells a property that they bought 10 years ago for £150,000. The property sells for £200,000, representing a profit of £50,000. After deducting the allowance, the total taxable amount is £38,900. Depending on their tax bracket, the landlord will pay between £7,002 (lower rate) and £10,892 (higher rate) in CGT.

You need to declare the sale of any buy-to-let property on your tax return – there are extra pages on the form for this. This is true even if you haven’t made a profit, so bear that in mind.

Multiple assets must be worked out separately

You need to work out the gain separately for each asset disposed of in the same tax year. HMRC defines ‘disposal’ as either selling or giving away an asset. Therefore it is important to record every disposal, even if the asset was given away, because this may represent a loss.

Example (continued): In the same year that the landlord made £50,000 profit on the sale of their property, they also suffered a £2,000 loss on the stock market and a £15,000 loss on the sale of a second property. After deducting the personal allowance, their taxable gains for the year are reduced to £21,900.

Losses in previous years can be offset

Losses made in previous years, including giving away an asset that you originally paid cash for, may be offset against profit made in subsequent ones. If you have lost more in a previous year than you make in profits in a subsequent year, and have not yet offset the amount, you would not have to pay CGT at all.

Your main home is an exception to this allowance; if you make a loss on the sale of your principal residence, you may not offset this against sales profits elsewhere.

Certain expenses may also be deducted

Just as you enjoy deductions from your income tax such as general maintenance, refurbishments and agent fees (which we cover in more detail in our article on buy to let running costs), you can also offset certain costs against your capital gains tax bill. This includes money spent on buying or selling the property or adding value to it. For instance:

  • Advertising costs
  • Conveyancing fees / solicitor’s costs
  • Estate agent’s fees
  • Improvements (things that add value to the property, as opposed to general repairs and upkeep)
  • Stamp duty

Example (continued): In addition to the purchase price, the landlord also spent £500 in stamp duty and £1,500 in other buying costs when they bought their property. Seven years in they spent £7,500 on a new kitchen, and selling costs added a further £2,000 when they finally disposed of their investment.

The total costs of £11,500 can be offset against the sale profits, along with capital losses from other disposals. In this case, the taxable profit can be reduced to £10,400, meaning that at the lower rate the CGT bill would be £1,872 and at the higher rate it would be £2,912.

More information on capital gains tax

Visit the HMRC website for more information on capital gains tax., and remember – if in any doubt about your tax affairs, it’s always best to speak to a qualified accountant.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.