When selling a buy-to-let property, be aware of the tax and mortgage ramifications.

You’ve made the decision to sell your present investment property and buy a new one, reduce your buy-to-let portfolio, or stop investing in real estate altogether. This article will help you think through the important issues before you put your rental property up for sale.

What is the best way to sell your buy-to-let property?

Talking to your tenants about the possibility of selling your property is a wise move once you’ve made the decision to do so.

A tenanted buy-to-let or a vacant home on the open market may be your best option in the event that this is not an option. Pros and downsides can be found for both options:

Only other landlords interested in renting out their properties will be interested in purchasing yours if it is already rented out. The drawback to this approach is that it necessitates a great deal of red tape.
Without tenants, you’ll have to put your home on the market, which could lead to a higher price when you decide to sell. Of course, before you can sell your property, you’ll have to dismiss your current tenants and possibly spend money on cosmetic improvements.

Regardless of whether or not you have a written tenancy agreement, you and your renters will need to be on the same page when it comes to allowing potential buyers to inspect the property.

If you have a good relationship with your tenants, they may be more motivated to clean up their mess if possible purchasers come to look at your house.

Selling a rental property that already has tenants

To sell to an investor can be faster than putting the property up for sale on the general market, because buyers of buy-to-let properties are more experienced, have fewer chains, and are less emotionally driven. There is, however, an added administrative burden.

For instance, you’ll have to supply the new landlord with the tenancy agreement, as well as Right to Rent records, gas safety certifications and inventories. Your protected tenancy deposits must be transferred to the new landlord’s name as well.

After the sale is completed, tenants may have to undertake additional referencing checks and sign updated lease agreements with the new landlord. However, this process is much less onerous than eviction in many ways.

Selling a buy-to-let property that is currently unoccupied

Tenancy agreements have break clauses and contract requirements that must be adhered to if you want to remove your tenants before selling the property. You cannot simply serve notice whenever you want.

A compromise with the tenants, such as offering a monetary reward for their consent to vacate early, may be necessary if you intend to sell the home during the agreed-upon time frame. The tenants are the ones with the upper hand here, legally speaking.

For no-fault eviction notices, you can utilise Section 21 notices, if you’re nearing the end of your lease, or if your renters are on a “rolling” contract. They’ll have two months’ notice to leave the property now.

Decorate the house before putting it on the market, but keep in mind that a buy-to-let mortgage means that rental revenue will be lost during this time.

Real estate transfer tax on the sale of a buy-to-let investment

Capital gains tax applies to the sale of buy-to-let properties (CGT).

In the case of higher-rate taxpayers, this is levied at a rate of 28 percent (for basic-rate taxpayers) or 18 percent (for higher-rate taxpayers). The gain, if you’re a basic-rate taxpayer, will be added to your income, which means you can be pushed into a higher-rate tax bracket.

Those who make more than £12,300 per year in 2021-22 will be exempt from paying capital gains tax (CGT).

Stamp duty and conveyancing fees paid when you purchased the property can also be deducted from the sale price, as well as estate agent fees. In addition, you should be able to deduct the cost of any property modifications from your CGT payment.

You can’t deduct property maintenance costs or mortgage interest from your taxes.

What happens to your mortgage if you sell a rental property?

In the planning stages of selling your buy-to-let property, it’s crucial to examine the mortgage consequences.

You need to keep this in mind if you have a fixed-rate mortgage, in which your monthly payments are fixed for a predetermined period of time (usually two or five, though 10-year deals are becoming more common in the buy-to-let sector).

Early repayment penalties are common with longer-term fixed-rate agreements. For example, the repayment charge on a five-year fix may be as high as 5% in the first year, before reducing to 4%, 3%, 2% and 1% each year until the conclusion of the introductory term. This is just an example.

Make sure to check the fine print of your mortgage before making a decision on when to get rid of it.