Is there a way to cut my tax bill when I sell my buy-to-let property?

Question

I own a buy-to-let property with an interest-only mortgage. Thanks to George Osborne’s changes to the tax rules, I’m planning to sell up within the next 18 months. In the meantime, I’m wondering if I should make overpayments on my mortgage?

I bought the property for £175,000 and recently sold an identical one for £219,000. I’ve spent around £20,000 doing it up and lived in it for 18 months at one point.

Will overpaying the mortgage put me in a worse position when the tax bill is calculated after I’ve sold? 

SB/Haverhill

Answer

You may have to pay capital gains tax (CGT) if you make a gain when you sell a property that’s not your home, such as a buy to let. The gain is calculated as the difference between what you paid for your property and the proceeds of the sale. This means there is no tax advantage in paying off your mortgage early.

You can deduct costs of buying, selling or improving your property from your gain. These include estate agents’ and solicitors’ fees, and costs of improvement works, but not maintenance work.

The basic test provided in law is whether the work is enduring in nature. An extension is considered allowable but upkeep to the garden is not. Assuming the £20,000 qualifies as deductible for CGT purposes, you will be assessed on a gain of £24,000 before relief and before the annual exemption of £11,100.

 

As you lived in the property as your main home, then you should be entitled to some relief on the capital gain for that time.Those 18 months, plus the final 18 months of ownership, because you are entitled to CGT private residence relief final period exemption, will attract relief.

Assuming you owned the property for 10 years, 36 months of this time, that is 30% of the gain, will be subject to relief and you’ll be taxed on the remainder.

 

CGT is levied at 18% if you are a basic-rate taxpayer and 28% if you are a higher-rate taxpayer. You may be able to use this to your advantage by deferring the completion of the sale to a tax year when your income falls into the basic-rate band. For example, if you expect to pay higher-rate tax this year and basic-rate tax next year, you could defer to 6 April 2017 and save yourself 10% CGT. In any event, you will need to complete a self-assessment tax return.

David Wesley-Yates
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.

Your Comments

Hi there, 

You're not allowed to carry over your capital gains tax allowance from previous years. If you don't claim your allowance before the end of a tax year it's gone, sadly. 

Is CGT annual allowance cumulative or is it a one off allowance of £11100 in the tax year upon selling?
I own three properties and plan to sell one that I have owned for six years