How to sell your buy-to-let property in 2023 – and pay less tax

Investors are fleeing the rental market as climbing mortgage rates and punitive tax changes leave many struggling to make a profit.

In 2022, landlords sold 35,000 more properties than they bought – the largest net loss in three years, according to analysis by the estate agency Hamptons.

But getting rid of a rental property can seem like a tax minefield, amid complicated rules that hammer your profits. 

Those landlords selling up are charged capital gains tax (CGT) on any money they have made on their property – but there are legal avenues to reduce how much you pay. 

Remember to use all available reliefs

When selling a buy-to-let, owners are able to offset a number of costs against their CGT bill. These could include estate agent and solicitors’ fees, stamp duty paid when purchasing the property, as well surveyor’s costs and funds spent on home improvements.

For example, someone who made £10,000 in capital gains and spent £5,000 on a loft conversion would not have to pay any tax as that would bring the total gain to less than the tax-free annual allowance of £6,000.

Move in to the property

You do not normally have to pay CGT when selling your main home, thanks to private residence relief. If a rental property was at some stage your main residence you may be able to reduce your bill using the same tax break. 

Zena Hanks of Saffery Champness, the accountancy firm, said: “The period where it was occupied will qualify for exemption from CGT. Any gains made in the final nine months prior to the sale will also be exempt, whether you lived in the property during that time or not. 

“It is important to note that the quality of occupation of the property is key to claiming this relief and it is an area that HM Revenue & Customs will challenge if an inappropriate claim for main residence relief is made.” 

In other words, you must have genuinely been living in the property, as a main home, to qualify. 

Ms Hanks added that HMRC would quickly disqualify someone from private residence relief if it seemed they had simply moved in to pay less tax. 

Chris Etherington of RSM, another accountancy firm, said moving into a rental property before selling it could store up CGT issues for the eventual sale of any other home the landlord owned, so would need to be considered carefully.

Use a company structure

Holding rental properties within a limited company comes with a number of tax benefits, not least the ability to offset all mortgage interest payments against their tax bills – a perk no longer available to landlords who hold property in their own name.

Another benefit of a company structure is paying corporation tax on sale of any rental properties, rather than CGT of up to 28pc. Corporation tax rose from 19pc to 25pc in April, but only for landlords with yearly profits in excess of £50,000.

It is also useful when collecting rental income. Landlords are charged corporation tax on their earnings, rather than income tax. The rates for the latter are 20pc, 40pc and 45pc depending on your earnings. 

Unlike income earned by individuals, there is also no National Insurance due and if the company pays out less than £1,000 in dividends in a financial year, these payments are tax-free. 

Mr Etherington said: “It’s important to note though that HMRC is likely to take a dim view of selling properties soon after incorporating.”

Make use of your partner’s tax allowance

Married couples and civil partners who are selling a rental property can utilise gifting rules and their individual CGT allowances to reduce their bill. If one member of the couple has already used up their allowance for the year they could gift their half of the property to their spouse, who can use their full tax-free amount.

For instance, if a husband and wife sell a property jointly for a £10,000 profit (or £5,000 each), and the wife has already used her full £6,000 tax-free allowance, she will be liable for CGT on the full £5,000. The husband’s £5,000 gain would fall below his allowance and be tax free. 

However, if the husband owned the property outright, he would be able to use his full £6,000 allowance and pay tax on just £4,000 of the £10,000 gain. 

Ms Hanks said: “Make sure there is a legitimate reason for transferring the property, for example, that one spouse is mostly running the buy-to-let, or put in a large amount of capital for the purpose. Otherwise you could be challenged by HMRC.” 

Partners who are married or in a civil partnership can pass property between them without incurring stamp duty, unless the house has a loan attached to it.

Use a more tax-efficient way of investing in property

If government crackdowns have made it unprofitable to continue your buy-to-let business, there are other ways to get returns from the property market which are much more tax efficient.

One option is to put some of the profits from the sale into a real estate investment trust, which specialise in investing in property. This would give you access to potential gains in the market without the hassle of managing tenants and filling in tax returns. 

Most real estate investment trusts – known as Reits – focus on commercial properties, such as offices and shops, rather than homes. Shares in investment trusts can be held within an Isa, meaning any returns you make are free of tax. However, they are far from risk free: Reits are listed on the stock market, which means the value of your investment will fluctuate daily.

There has also been a big shock to the sector recently, after one of its biggest players came under a short seller attack. Shares in Home Reit, which owned assets worth more than £1bn, were suspended after the trust missed the deadline to publish its annual results.