Tax On Selling Rental Property

Selling a rental house is a big decision for property owners in the United Kingdom. Besides the potential profits from the sale, there are tax implications to take into consideration. Here you will find comprehensive insights into the Capital Gains Tax (CGT) on selling a rental property in the UK, including how much tax you might need to pay, the current applicable tax rates, and other vital considerations to help you make informed decisions.

Do You Pay Tax On Selling A Rental Property?

When you sell a rental property in the UK, you may have to pay taxes on the profit you have made from the sale of such property. Capital Gains Tax is a tax on the gain realised from selling certain assets, including rental properties. It’s important to note that Capital Gains Tax is calculated based on the “chargeable gain,” which is the difference between the property’s disposal value (the amount you received from the sale) and its “base cost” (the original purchase price plus allowable costs).

How Much Tax Is On Selling A Rental Property?

The amount of tax you pay on selling a rental property depends on several things, including the

initial purchase price of the property, the selling price, and any allowable costs related to the sale. To calculate the Capital Gains Tax, you would deduct the property’s acquisition cost (including related expenses) from the disposal value. The resulting gain will be subject to Capital Gains Tax.

For example, if you bought a home for £200,000 and you then incurred £10,000 in allowable costs, making your base cost £210,000, and then sold it for £300,000, your chargeable gain would be £90,000 (£300,000 – £210,000). This is the amount that would be subject to Capital Gains Taxes.

Capital Gains Tax On Selling A Rental Property

Capital Gains Tax rates may change with your overall income and the type of property being sold. As of the last update in 2021, the rates are as follows:

1. a) Basic Rate Taxpayers: For individuals whose total taxable income, including the gain from the rental property sale, falls within the basic income tax band, the Capital Gains Tax rate is 18%.
2. b) Higher Rate Taxpayers: If your income pushes you into the higher or additional rate tax bands, the Capital Gains Tax rate for the rental property gain is 28%.

It is important to consider your income tax bracket when planning the sale of a rental property, as it can significantly impact the tax on selling a rental property.

Applying Tax Reliefs

While selling a rental property usually means you will be subject to Capital Gains Tax, certain reliefs might be applicable to reduce the tax burden:

1. a) Private Residence Relief: If the property was previously your main residence and you meet certain conditions, you may qualify for private residence relief, reducing or possibly even eliminating the Capital Gains Tax liability. This relief can be beneficial if you lived in the property before you rented it out.
2. b) Letting Relief: If the property was once your main residence and later became a rental property, letting relief might apply, which would then offer further tax reductions. The letting relief can be up to a maximum of £40,000 per person.
3. c) Annual Exempt Amount: Each tax year, individuals have an annual exempt amount (tax-free allowance) for Capital Gains Tax. As of the last update, the annual exempt amount is subject to change, so it is imperative to stay updated with the latest tax regulations.
4. d) Rollover Relief: If you plan to reinvest the gains from the sale into another qualifying asset, you may be able to defer the Capital Gains Tax liability using rollover relief.
5. e) Entrepreneurs’ Relief: Entrepreneurs’ relief can reduce the Capital Gains Tax rate to 10% on the gains from selling a business, which may be relevant if you operated the rental property as a business.

Period Considerations

The length of time you have owned the rental property can affect the Capital Gains Tax liability. In the UK, there are two Capital Gains Tax rates applicable to residential properties: the standard rate (18% or 28%) and the rates for residential property (up to 28%). The rates depend on the length of time the property was owned.

For properties owned before April 6, 2020, the standard rate applies to the chargeable gain. For properties purchased after this date, the rates for residential property may apply, resulting in higher Capital Gains Tax for some who are wanting to sell their rental property.

Seek Professional Advice

Tax laws and rates can and do change, and the calculations can be complex and difficult to understand, so it is highly advisable to talk to a tax professional to ensure you understand the latest regulations and to optimise your tax position when selling a rental property. They can guide you through the reliefs that are available to you regarding capital gains tax on selling a rental property, advise on the most tax-efficient strategies, and help you plan for any potential tax liabilities.

Record-Keeping And Documentation

Good documentation is key when it comes to calculating Capital Gains Tax after you have sold a rental property. Keep all relevant documents, such as purchase contracts, receipts for allowable costs, and details of any improvements made to the property. These records will be key information when completing your Capital Gains Tax calculations and reporting to HM Revenue & Customs (HMRC).

Selling a rental property in the UK can yield substantial financial gains, but it also comes with tax implications in the form of capital gains tax. Understanding how Capital Gains Tax is calculated, the applicable tax rates and the potential reliefs available can help you plan and manage the tax rate on selling rental property. Be sure to keep thorough records and talk to a tax professional to make sure you are compliant with current tax regulations and make informed financial decisions. With the right understanding and help, you can make sense of the complicated world of Capital Gains Tax and make the most of your rental property sale.