1 in 5 Landlords to Sell Buy-to-Let Property – Find Out How

Rising mortgages and falling property prices are set to push up to 20% of landlords into selling their buy-to-lets – especially smaller landlords with only one or two properties.

The cost-of-living crisis is also making repairs and maintenance fees unaffordable, increasing insurance premiums, and casting doubt on whether tenants will be able to pay rent.

If you’re looking to sell your rental property, learn the key things to consider before putting it on the market, such as mortgage and tax implications. Read more below.

Should I sell my property as tenanted or vacant?

When looking to sell your property, you’ll need to decide whether it will be tenanted or vacant – both options come with positives and negatives:

Tenanted Property

This makes other landlords your target market. They are usually more experienced buyers and will be keen to buy quickly so they can start receiving rents.

However, this does come with additional admin, such as providing tenancy agreements, Right to Rent records, gas safety certificates (and more) to the new landlord. You’ll also need to transfer the tenancy deposits.

You won’t need to evict tenants, but they may need to sign updated contracts and undergo new reference checks for the new landlord after the property sale.

Vacant Property

This means your home will be on the open market, with the prospect of achieving a higher selling price. However, you may need to invest in sprucing it up before selling (resulting in loss of rental income during this period).

If your property has tenants, you’ll also need to follow the correct eviction procedures. A sale during the contracted period may require financial compensation to the tenants for an early exit – or, if you’re reaching the end of an agreement, have a specified break clause, or a rolling contract in place, you can serve a Section 21 notice. This gives your tenants two months before they have to leave.

Whichever option you choose, it’s important to communicate fairly with your tenants – good will aside, they will need to allow prospective buyers to enter, and maintain the property in good condition for viewings.

What are the mortgage implications?

As you prepare to sell your buy-to-let, you need to consider the mortgage implications – particularly if you’ve taken out a fixed-rate mortgage, with repayments over a set number of years (usually two-five, with 10 years becoming increasingly common).

If it’s a longer-term, fixed-rate deal, it’s likely to come with high charges for early repayment – e.g., in a five-year deal, the first-year repayment could be 5%, and the final year, 1%. This is obviously product-dependent, so make sure you check your mortgage’s specifics before you sell.

Will I be taxed when selling a buy-to-let?

Yes – if you sell your buy-to-let property, any growth in value will be subject to Capital Gains Tax (CGT). For basic-rate taxpayers, this is charged at 18%, and for higher-rate taxpayers, at 28%. Also, note that the gain will be added to your income, which may push you into a higher tax band.

You must report the disposal and make the CGT payment on account to HMRC up to 60 days from the date of completion (not the date of the contract exchange). Otherwise, late filing penalties may be charged, along with any interest accrued from unpaid tax. This is in addition to filing Self-Assessment Tax Returns (SATR), but you must also include the capital gain in your year-end SATR.

How do I reduce Capital Gains Tax?

To reduce your CGT bill, you must always seek professional advice first, and carry out any planning ahead of the exchange – but consider the following:

Use your tax-free allowance

You’ll only pay CGT on profits above your tax-free allowance – £12,300 per year in the 2022-23 tax year – which can’t be carried forward into future tax years. If you’ve already used your CGT allowance, considering postponing the property sale until the following tax year

Consider joint ownership

If you own a property jointly with your spouse, possibly with a Declaration of Trust, you can use both of your tax-free allowances – a total of £24,600.

Note that your spouse may be in a lower tax band, which may help to reduce your final CGT bill – but don’t forget Form 17, which allows you to change the split of income to your actual share of ownership, e.g., you could consider transferring all or part of the property to your spouse when you come to sell. If there’s a mortgage on the property, watch out for possible Stamp Duty Land Tax issues.

Offset costs

You may be able to offset the following costs against your CGT bill:

  • Costs incurred when you bought the property, such as stamp duty and conveyancing
  • Costs when you sell, such as estate agent charges
  • Capital improvements made to the property since purchase

However, you can’t deduct costs of general property maintenance, or mortgage interest.

Set up a limited company

Only individuals pay CGT on residential sales, so many buy-to-let landlords are setting up limited companies to manage their portfolio and reduce their tax bills. Any profits made through a limited company are liable to Corporation Tax at 19% (much lower than the 28% higher rate CGT).

N.B. This needs doing a few years in advance of any sale, and won’t assist if you’re selling a personally owned property in the near future.

Check relief entitlements

You may be entitled to Private Residence Relief (PRR) if you’ve lived in your buy-to-let property – you can claim for the years it was your principal residence, as well as the nine months before the sale. If you’ve let out part of your property, you’ll only get PRR on this proportion.

You may also qualify for Letting Relief of up to £40,000 if you lived in your property at the same time that part of it was rented out.

And many more

Further savings may be available with more sophisticated planning – see our contact details below.

Need Help with Capital Gains Tax?

Are you a landlord worried about Capital Gains Tax on your buy-to-let sale?

We can help you with filling out tax returns, managing records, and planning effectively – so you only pay what you need.

Arrange an appointment with one of our friendly experts today – either drop us a message on our contact form, call directly on 01743 562430, or email hello@mercianaccountants.co.uk.

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