Selling a Rental Property – Capital Gains Tax Due

If you are considering purchasing a property to rent out, or currently have a rental property, this might be a nice read for you.
Once you have purchased a property to rent out, with the intention of earning income for several months, or even years, this becomes one of your business assets from which, may earn you future profits.
If you decide to sell this rental property at a later date, for a variety of different reasons such as it being something that you no longer wish to keep, HM Revenue & Customs (HMRC) will expect you to pay capital gains tax on any gain made from the sale of the business property.
HMRC should be updated within 2 years, if you do change your principal private residence (PPR) address. For example, if you purchase a new property to live in but wish to keep your old property to rent out, HMRC should be informed of the change in the PPR address within 2 years of buying the new property.
This is a very important factor, as if you have previously lived in the rental property before renting it out, the months/years the property was your principal private residence, this relief can go towards reducing down your tax bill arising from any capital gain made on the sale.
When completing the capital gains tax calculation for the sale of the rental property, there are a few things which are taken into account. Here are some of the items which will be considered and will be worth keeping a note of throughout the period of ownership (whether rented out or not):
– Purchase Date and Price of the Property
– Associated Acquisition Costs in Purchasing the property (including Stamp Duty)
– Disposal Date and Proceeds (sale date and price)
– Additional Disposal Costs
– Incidental Costs (costs spent out during the period of ownership)
– Enhancement Costs (costs spent out during the period of ownership)
You may be entitled to Principal Private Residence Relief and/or Lettings Relief, which are two reliefs you could be eligible for when selling your property and can massively reduce down the amount of tax you have to pay.
Principal Private Residence Relief is calculated using the amount of months you have owned the property, and includes months where the property was actually classed as your principal private residence. You could also be eligible for Lettings Relief and this will take into account the months that the property was rented out, throughout the period of ownership.
The remaining gain after taking all of the above into account will be subject to capital gains tax, which can be taxed at either 18% or 28% depending on the level of your other taxable income in the year of sale.
If you are thinking about selling a rental property, or want some advice on any of the above, please do give us a shout – ideally before you have already sold the property! We may be able to complete some draft calculations for you and give you a rough estimate of any future capital gains tax bill that may be due!