Selling Your Vacant Buy-to-Let: Can you offset Capital Gains Tax with the cost utilities and local rates?
When selling a property, particularly a buy-to-let, understanding what expenses can be deducted to reduce your capital gains tax (CGT) liability is crucial. Unfortunately, utilities and local rates are considered running costs and are not classified as capital expenses. As a result, these costs cannot be used to reduce your CGT bill upon the sale of your property. However, depending on your situation, you may be able to deduct these costs from your rental income, which could help reduce your income tax.
Understanding Revenue vs. Capital Expenditure:
Property-related expenses generally fall into two categories: revenue expenditure and capital expenditure.
Revenue Expenditure, includes ongoing costs like water rates, council tax, utilities, maintenance, repairs, and mortgage interest. These can typically be offset against your rental income to lower the income tax due. Note that for most landlords, relief on borrowing costs is restricted to a basic-rate tax credit of 20%.
Capital Expenditure, involves costs that contribute to the property’s long-term value, such as the original purchase price, acquisition and selling costs (e.g., estate agent fees, legal costs, stamp duty), and significant upgrades or extensions. These costs can be deducted from the property’s sales proceeds when calculating your capital gain or loss.
Utilities and Local Rates: Revenue Expenses or Not?
Utilities and local rates are considered revenue expenses since they relate to the day-to-day operation of your rental business. Typically, these costs can be deducted from the rental income generated by your buy-to-let properties. If you have multiple rental properties, you can offset these expenses against the income from any of your properties, as they are all part of one rental business for tax purposes.
However, if this is your only rental property and it’s currently vacant, you might not be able to claim tax relief for these costs. Once your rental business is considered to have ended (usually when the last tenant vacates), these expenses can no longer be offset against other income or capital gains.
Calculating Your CGT:
When calculating your CGT liability, you can deduct any capital losses carried forward from previous years. Additionally, you might be entitled to offset the annual CGT exemption, currently £3,000, against your gains, depending on your overall tax situation. For higher and additional rate taxpayers, the CGT rate on residential property gains is 24%, while basic-rate taxpayers are charged 18%. Remember, residential property gains must be reported to HMRC within 60 days of completing the sale.