Recent government changes have impacted the income landlords earn from rental properties, especially when it comes to selling a rental property in London. As property prices increase in Croydon and other boroughs, many landlords are asking: “What tax do I pay when I sell my buy-to-let property?” This guide from rent guarantee specialists Denhan International outlines the key taxes involved.
Capital Gains Tax (CGT)
Capital gains tax on rental property applies when you sell a property that isn’t your primary residence. If you gift the property to a spouse, civil partner, or charity, CGT does not apply.
In the 2016/17 tax year, everyone had an £11,100 CGT allowance. You only pay tax on profits above that amount. To calculate your gain:
Market Value – (Purchase Price + Buying/Selling Costs + Improvement Costs) = Gain
Then:
(Gain – CGT Allowance – Reliefs) × 18% or 28% = CGT to Pay
The applicable rate depends on your income tax band—18% for basic rate taxpayers, 28% for higher rate taxpayers. However, most capital gains on selling rental property exceed the basic band due to property price increases, meaning the 28% rate often applies.
Allowable Deductions
You can reduce CGT by deducting:
- Estate agent and legal fees
- Stamp duty paid when you bought the home
- Improvement costs (like extensions). Maintenance (like painting) is not deductible unless the improvement still exists at the time of sale
Real-World Example
If you installed two sets of replacement windows, only the cost of the set still in place at sale can reduce your tax.
Types of Tax Relief
Private Residence Relief (PRR)
Available for the period you lived in the property. Even some time spent working away may qualify. The HMRC defines ownership from the acquisition date (or 31 March 1982, whichever is later) to the disposal date.
Letting Relief
If the property was your home at some point and you paid income tax on rental earnings, Letting Relief can reduce taxable gains by up to £40,000 per owner.
Note: You cannot claim more Letting Relief than PRR.
Final Period Exemption
Regardless of how the property is used, the final 18 months of ownership are CGT-exempt if the property was your main home at any time.
How to Calculate Your CGT Bill
Sale Price – (Purchase + Improvements + Fees) = Profit
(Profit – Allowance – Reliefs) × Rate (18% or 28%) = Tax Due
If you are a non-resident landlord, you only pay CGT on the gain accrued since 5 April 2015.
Other Taxes Involved in the Sale
Value Added Tax (VAT)
VAT at 20% applies to third-party service fees (estate agents, legal reps) during the sale of rental property.
Stamp Duty Land Tax (SDLT)
Stamp duty on selling buy-to-let property is not applicable. Only buyers pay SDLT. Buyers of second homes pay a 3% surcharge in addition to standard SDLT rates.
Frequently Asked Questions
1. Do I pay tax on selling rental property even if I lived in it before?
Yes, but Private Residence Relief and Letting Relief may reduce your CGT bill significantly if the property was your main home.
2. How much is capital gains tax on selling a rental property?
You pay 18% (basic taxpayers) or 28% (higher rate taxpayers) on gains above your CGT allowance. Use the formula shared above to estimate your bill.
3. What is considered an improvement for CGT purposes?
Extensions, loft conversions, and other physical changes that add value and are still present at the time of sale count. Redecoration or repairs do not.
4. Can I deduct estate agent and legal fees?
Yes. These are considered legitimate selling costs and reduce the amount subject to capital gains tax on rental property.
5. What if I already sold rental property—can I still apply reliefs?
Yes, you can still apply PRR or Letting Relief when filing your return, but ensure all documentation is accurate and submitted on time.
6. Do I pay income tax or CGT on selling my rental home?
The tax on selling a rental property is capital gains tax (CGT), not income tax. However, you may owe income tax on any rental income up to the sale.
7. Are there any CGT exemptions for elderly or disabled landlords?
Some exemptions exist if the property was occupied by a dependent relative. Consult a tax adviser for case-specific advice.
8. How does CGT differ if I’m selling a buy-to-let property?
Selling buy-to-let property tax rules apply just like for any non-primary residence. Reliefs may apply depending on how long you lived in the property.
9. Is there extra tax if I sell a rental property quickly?
No additional tax for fast sales, but make sure to factor in all costs and use available reliefs to reduce your CGT bill.
10. What professional support do I need?
We recommend speaking with a qualified tax adviser. Denhan International provides guidance on selling a rental property capital gains tax, but personalised advice ensures compliance and savings.
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