Written by Lewis Ridley
Updated over a week ago
This guide will walk you through a few completely legal ways to reduce your capital gains tax on your buy to let property. Let’s jump straight in.
Sometimes a quick and easy way to avoid some capital gains tax is by moving your buy-to-let property into a limited company.
This is because capital gains tax only applies to private individuals, not companies. When you have a BTL in wrapped in an LTD, you only ay corporation tax, which is 19%.
However, this only really makes sense if you’re earning above the basic income tax band. Basic income earners only pay 18% on residential property. If you earn over the basic tax band, you’ll be paying 28% in capital gains tax. If you’re in the latter bracket, it makes sense to do the switch.
Bear in mind setting up a limited company can be a complicated process for property. There are quite a few options available and different company structures to consider. In either case, talking to an accountant can guide you in the right direction.
Just like with basic income, you have a tax-free allowance with capital gains tax. You won’t be paying 18-28% on the entire sum of a property sale, you’ll only pay the amount that exceeds your tax-free allowance.
At the time of writing this, your individual allowance is £12,300. This means if you make a £20,000 profit on a property sale, you will only get taxed at 18% on £7,700. That would mean paying £1386 in capital gains tax.
Remember to use your allowance as much as you can to bring down those payments and keep more profits.
As capital gains tax is actioned as a private level, each person who owns the house has an individual allowance. This means you can double up on tax-free allowances, giving you £24,600 in tax-free allowance.
If you have a spouse or a JV partner that could put their name on the house, you could save a lot of money very easily. Unless of course they want to keep a share of the profits.
Primary residence relief allows individuals to avoid capital gains tax if the property they’re selling is or was at some point their primary residence. This allows landlords to obtain tax relief from the years where the property was their primary residence – when it wasn’t being rented out.
You could significantly reduce your capital gain tax bill if you can prove you lived in the property at some point. However, bear in mind recent changes have meant you must be able to prove you were living with the tenants during the rented periods as well.
You can also make the property your main residence through a process known as 'flipping'. This is where the landlord changes their residence to a buy-to-let property they know will be unoccupied for a period of time.
It is completely legal, and you can change your elected residency as many times as you want. Just know there is a 2-year cooling period between home changes.
However, be careful with this as you’ll need to have all the official documentation in place. Your name will have to be on the electoral register, utility bills, and the address will need to be on your bank statements. It really must be your main residence. Any suspicions that it is not can result in investigations for tax evasion.
With this approach, consult an accountant before moving forward.
As with any tax process, you can include deductions to help bring down your capital gains tax bill. A process many are familiar with but might be unaware of what they can deduct to save money.
You can deduct a lot of things from your capital gains tax bill, including:
- Costs of improving the property
- Stamp duty fees
- Surveying and valuation fees
- Estate agent fees
There will be other things you can deduct as well, but it’s important to consult an accountant to make sure you’re adding as many deductions as possible. With larger costs like renovations, you can deduct thousands from your bill. So, don’t be afraid to spruce up your buy-to-lets.
Capital gains tax cannot be totally avoided, but you can drastically reduce it using the tips above. Deductions can be a lucrative way to get the most profits out of a sale. However, if you have a good accountant, setting up a company or changing residencies could help as well.
If you need any further information on capital gain tax, check out our extensive knowledge centre. It’s packed full of useful property information.