What to know before deciding to sell your property as a landlord to make tax savings

What to know before deciding to sell your property as a landlord to make tax savings

The buy to let market has already seen many landlords selling up as landlords have been hit by many changes around tighter legislation, regulation and tax implications by Government in the past few years.

The Renters Reform Bill will bring landmark rental reforms that will once again hugely impact landlords and tenants throughout England. The bill has yet to become law and is due a third reading in the House of Commons but already the rental market is seeing fallout from the threat of this bill with less and less rental properties being available.

Many landlords are deciding to sell property or leave the buy-to-let market due to changes that may happen if the Renters Reform Bill does become law. However, there are things you should consider from a tax perspective before you decide to sell your buy to let properties.

In this blog we'll look at the Renters Reform Bill what it means to landlords and things you need to know before selling buy to let properties.

What is the Renters Reform Bill?

The Bill aims to provide more security for tenants and improve standards in the Private Rented Sector, whilst also ensuring landlords retain certain rights to possession of their properties.

In May 2023, the bill was introduced to Parliament. The legislation now has 18 months to pass through Parliament before next year’s general election to make it into law.

Disadvantages of being a landlord after the Renters Reform Bill

Below are just some of the disadvantages that the Renters Reform Bill brings to landlords and the reasons why many landlords are now considering 'selling up'.

If the Renters Reform bill becomes law, it will become:

• More difficult to evict tenants, especially to issue 'no fault' evictions.
• Mandatory for landlords to abide by a Decent Homes Standard (meaning you will need to meet a minimum standard regarding the condition and state of repair of properties).
• The end of fixed-term tenancies.
• Easier for tenants to have pets.
• Illegal to ban tenants with children or those claiming benefits.
• More difficult to increase rent (rent will only be able to be increased once a year and you will be required to give a notice period of two months of any increase).

 

How to sell your rental properties tax efficiently

Many landlords can end up paying unnecessary taxes or lose money when they sell rental property simply because they do not take professional advice or full advantage of all available tax reliefs on offer to them.

 

Capital Gains Tax on sale of property

Capital gains tax (CGT) is paid on the profit you make when you sell an asset that has increased in value. Some assets are tax-free, including your main home.

But if the value of your buy to let property has increased since you bought it, you may have to pay CGT on some or all the profit when you sell it.

Can you avoid Capital Gains Tax on the sale of rental property?

There may be ways to reduce your Capital Gains Tax bill when you sell rental property and I explore these options below.

Capital gains tax personal allowance

You have an annual CGT personal allowance. This CGT allowance is called the annual exempt amount and is currently £6,000. You should ensure you utilise this allowance if you are selling a property and have no other capital gains in the year.

Cost that can be deducted from any capital gain

There are certain costs that can be deducted from any capital gain when you sell a property.

These include things like:

• Estate agent fees
• Solicitors' fees
• Stamp Duty paid when you purchased the property
• Surveyors costs
• Costs for improvements such as extensions etc.

Reducing CGT by changing elected residence

If you sell a property that was once your main residence that you have let out at some stage, you may qualify for tax relief to reduce your CGT bill.

Nominating a new main residence is a practice used by many landlords to reduce exposure to CGT, but you should consult an accountant before doing this. If you have an unoccupied buy-to-let property, then you can consider changing your nominated residence, and this can reduce or avoid CGT on that buy to let property. This practice is known as 'flipping', and there is no limit to the number of times you can change your main residence.

However, you must have genuinely been living in the property, as a main home, to qualify. You and your spouse or civil partner must share the same designated main residence, you can't each elect a different one.

The period where it was occupied will qualify for exemption from CGT. Any gains made in the final nine months prior to the sale will also be exempt, whether you lived in the property during that time or not. 

You’ve got two years from the date the combination of properties changed to notify HMRC which of your properties is your main residence, so in this straightforward example, two years from the date the second property was acquired.

 

Corporation tax on gains

If you own your buy to let properties through a limited company, the rules are different to selling as an individual. When you sell a property through a limited company you pay corporation tax on the gain.

You're not entitled to use your capital gains tax-free allowance here. However, for higher rate tax payers, the overall rate of tax can be lower via a limited company.

Use a limited company structure to minimise tax

Holding buy to let properties in a limited company, rather than personally has many tax advantages, such as being able to offset costs such as mortgage interest payments against tax bills.

Another benefit of owning property in a limited company structure is paying corporation tax on sale of any rental properties, rather than CGT of up to 28pc. Corporation tax rose from 19pc to 25pc in April, but only for landlords with yearly profits in excess of £50,000. So, in many cases, paying corporation tax on sale instead of CGT can be very beneficial.

Landlords owning their portfolio personally should consider transferring their business to a company and discus the benefits of this with ourselves.

Make use of a spouses' tax band

Another way to potentially cut your tax bill as a landlord is to transfer your assets to your spouse. Capital Gains Tax is generally not paid when assets are transferred between spouses, so you could effectively make use of their lower tax bands.

Married couples and civil partners who are selling a rental property can utilise gifting rules and their individual CGT allowances to reduce their bill. If one member of the couple has already used up their allowance for the year they could gift their half of the property to their spouse, who can use their full tax-free amount.

Tax planning for landlords with Haines Watts

Here at Haines Watts, we can help you identify ways that you can potentially reduce your tax bill when selling your buy to let properties.

Conclusion

Before you begin selling any rental properties, you should seek professional advice from accountants such as Haines Watts. For more help and advice on how you can make tax savings when selling buy to let properties, contact our team in Liverpool, Wirral, or Chester.