Some properties bought with the plan to let out as a buy-to-let can end up being rented for many years. For these cases, it’s not necessarily suitable to sell this type of property to avoid Capital Gains Tax and mortgage implications. You might be better off continuing to rent until such time when you want or need the sale proceeds plus tax savings on additional capital gains and the removal of mortgages.
However, there may come the point in some people’s lives when they may decide that it doesn’t make sense anymore to continue letting their house at all costs because they don’t need the rental income or you have found an opportunity to acquire another property that offers better terms or prospects than your current one. Hence, it’s worth thinking about whether this might suit you.
Is It Better to Sell Your Buy-to-Let as a Rented or Unoccupied Property?
If you’ve decided to sell, it’s essential to speak with your tenants if they want to purchase the property themselves.
If this isn’t an option, you’ll have to decide whether to sell the property as a rented buy-to-let or as a vacant home on the open market. Both options have advantages and disadvantages:
- If you sell a rented house, your target market would be limited to other landlords who might be drawn in by the possibility of receiving rent right away. The disadvantage of doing that is that you’ll have to go through a lot of administrative hoops.
- If you sell a vacant property, you’ll be putting your house on the open market, resulting in a higher selling price. Of course, you’ll need to evict your current tenants first, and you may need to spend money sprucing up the property before selling it.
Selling a Rented Buy-to-Let Property
When you sell a buy-to-let property with tenants, the process is very different to selling a vacant property. You’ll need to tell your tenant about the impending property sale and get them to agree on how they want this handled. There are two options:
- Tenant stays in place. The quickest way of selling an occupation rental investment is for the existing tenant or landlord to remain in possession until after completion. It ensures continuity of occupancy and less hassle when it comes time to hand over any keys or other paraphernalia associated with the tenancy agreement. It also means there will be no void period which can prove costly if necessary; repairs are needed before finding new occupiers quickly enough! That said, you may not be able to get a buyer that’s happy with the existing tenant, which can impact pricing.
- Tenant moves out before completion. With this option, you’ll need to approach your tenant and agree with details about their move-out date. You might also want to establish what services they’re entitled too such as an inventory checklist, so there are no disputes later when it comes time for finalizing any outstanding rental arrears or other liabilities. It will involve more hassle finding new tenants because your property cannot remain vacant for very long periods without incurring penalties.
Selling an Unoccupied Buy-to-Let Property
The sale of a buy-to-let property with no tenants is more straightforward than selling one with tenants. You can choose when to sell. You won’t have to worry about any tenancy agreements or deposits as the tenant has already left, which means this stage in the process will be much quicker. You’ll need to ensure your solicitor removes all references from the title deeds so that potential buyers don’t try and contact previous occupiers if they do. It could put off prospective purchasers who are looking for an investment opportunity.
To make sure you get top dollar for your property, it’s essential to know what condition it’s in, especially roofing, how well maintained it is and whether any issues could affect the value of your property. Once you’ve had a chance to do some housekeeping, it’s time for the sale!
Capital Gains Tax When Selling a Buy-to-Let Property
If you live in England or Wales, your profits are subject to Capital Gains Tax1 (CGT) when you sell the property. CGT rates depend on how long you’ve owned it. If for less than one year, then 18%; if for between one and two years, 28% (25% plus an additional three percentage points); if over five years, 20%.
In Scotland, there is no such thing as capital gains tax2. However, any profit from a letting business will be taxed at income levels with any exemptions that may apply, including those relating to trading stock and borrowed money. The exception to this is where the investment property owner lets out their own home without living in it.
Buy-to-Let Mortgages Implication
When you sell a buy-to-let property, the vendor will need to repay any outstanding mortgage debt on your behalf. You may have some capital gains tax payable which could reduce the amount of money in your pocket after selling up depending on how much profit arises from the sale. You should also be aware that if you are an existing landlord and intend to purchase another rental property as soon as possible, it is worth considering buying to rent rather than taking out a new mortgage and borrowing more money when lending criteria has tightened considerably over recent years.
What Is Capital Gain Tax Relief?
Capital Gains Tax relief is a mechanism that reduces the amount of capital gains tax you have to pay. You can apply for this if you’re selling your properties and it’s been more than 18 months since they were bought or built, whichever was later.
You may also be able to claim relief if you inherit property after someone has died, you are claiming marriage allowance on the part of your home as your spouse’s primary residence, property prices go down but don’t hit an all-time low in the last 24 months before sale date (this goes by indexation rates from HMRC), your home sells at less than its purchase price because it needs extensive repair and you are selling your primary residence.
How Does Buy-to-Let Property Investment Work?
You may either pay cash or take out a buy-to-let mortgage with a cash deposit to purchase a residential home. Keep in mind that a mortgage carries the risk of selling your home at a loss. The selling price will not cover the entire amount you owe on your mortgage.
You’d have to compensate for the difference. Also, keep in mind that even though the tenants leave and there is no rent coming in, you must still pay your mortgage.
Can I Avoid Capital Gains Tax on My Buy-to-Let Property?
When you sell a buy-to-let property for more than you paid for it, this will be subjected to Capital Gains Tax (CGT). However, in some circumstances, you’ll be able to reduce the amount of your CGT liability.
Do You Pay Tax on Buy-to-Let Property Income?
Yes, indeed. The rent you earn is taxable income. Any rent you make must be declared on your Self-Assessment Tax Return. The tax on your earnings is then calculated based on your tax bracket (20 percent for basic rate taxpayers, 40 percent for higher rate, and 45 percent for additional rate).
There are plenty of factors to consider before selling a buy-to-let property but checking all facts should help provide food for thought when considering which option best suits each investor’s circumstances. It is also a good idea to seek professional advice.