Are you prepared for £40,000 tax bill when you sell your rental property?

A number of clients this week have queried the tax position on the sale of their rental properties. Typically these properties have been rented out for some time and are valued much higher than their original cost. Owners may appreciate that there will be tax to pay but don’t fully appreciate the amount that this can be!

Let me outline a common scenario. Two individuals who met in the 1990’s marry and retain ownership of both their former homes. One property was then rented out. Given the likely age of these individuals they will now be approaching retirement age and may be considering selling the rental property to fund their retirement.

However, it is only when reviewing the rise in house prices over the period of ownership that the true extent of the ‘problem’ can be appreciated. Say they bought an average priced property in 1994 for £65,000. In 2014, 20 years later, it would be worth somewhere in the region of £267,000. That equates to a gain of just over £200,000 waiting to be taxed on sale, albeit there will be a deduction due for fees on purchase and selling, in addition to any enhancements to the property during ownership which haven’t already been relieved against rental income.

There are some tax reliefs available which require some consideration. As the owner may have occupied the property at some point they will be eligible for Principal Private Residence relief. This will exempt part of the gain from tax. Also, if the property has been let out, and was previously occupied as their residence there may be some letting relief available. 

Assuming all £200,000 profit on the property is taxable and the property is jointly owned then the likely Capital Gains Tax bill at current rates could be in the region of £40,000. I’ve built some simplifying assumptions to help illustrate the point but as a general guide that may not be far from the end result.

If you or someone you know owns rental property that is worth significantly more than it cost (whether you intend to sell shortly or not) here is what you should do:

Wait until the sale completes to get in touch with your accountant. They will help you maximise the relief available and ensure all deductions for costs are made, but beyond that there is little they can do other than calculate the tax that you will inevitably have to pay.  

Get in touch with me. With some basic non-aggressive planning it is possible to reduce the £40,000 tax bill significantly. I don’t want to bore you with the details but we can discuss and see if it is suitable for you. 


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