Selling a buy-to-let or second home: what you'll pay in capital gains tax and how to reduce it

Selling a buy-to-let property or second home triggers capital gains tax on the profit you have made. With the annual exempt amount now reduced to £3,000 and rates unchanged, most sellers will face a meaningful tax bill.

Understanding how the tax is calculated and what can legitimately reduce it is worth doing before you put a property on the market.

The CGT rates on residential property

Capital gains on residential property are taxed at 18% if your total income and gains keep you within the basic rate income tax band, or 24% on any gain that falls into the higher rate band.

Your income tax band for the year of disposal is calculated first, and the capital gain is layered on top. If your salary uses up most of the basic rate band, much of your gain may be taxed at 24% even if you are not otherwise a higher rate taxpayer.

Calculating the gain

• Allowable costs include stamp duty paid on purchase, solicitor and estate agent fees on both purchase and sale, and the cost of capital improvements
• Routine maintenance, repairs, and mortgage interest are not allowable deductions for CGT purposes
• If you owned the property jointly, each owner calculates their own gain on their share
• The annual exempt amount of £3,000 is deducted from your gain before tax is applied

Capital improvements vs maintenance

Capital improvements that added to the value of the property, such as a new extension or loft conversion, could qualify as allowable costs. Repainting or replacing a like-for-like boiler does not count. Keeping records of capital work done during your ownership is worth doing from the moment you buy an investment property.

What lettings relief no longer covers

Lettings relief, which previously gave landlords up to £40,000 relief on a property that had been their main home, was significantly restricted from April 2020. It now only applies where the owner and tenant are in the property at the same time, which covers very few modern letting arrangements.

Approaches that may reduce the bill

Timing the sale to straddle two tax years can allow you to use two annual exempt amounts, though the gain must genuinely fall in different years and not be artificially split.

If your property is owned jointly with a spouse or civil partner, each of you has a separate annual exemption and separate rate band. Capital losses from other disposals in the same tax year can also be offset against your gain.

Reporting and payment

CGT on residential property must be reported and paid within 60 days of completion, using HMRC's online property disposal service. This deadline is strict.

Devonshire Wealth connects property owners with tax specialists who can review your position before you sell. Visit our property tax planning page to find a qualified adviser who can help you understand your exposure and any legitimate options.