Selling a BTL property to a tenant who is renting it already

Selling a buy-to-let (BTL) property to the tenant who is renting it can be a mutually beneficial arrangement. For the tenant, it is a chance to become a homeowner without the stress of moving. For the landlord, it can potentially streamline the selling process and reduce marketing costs, while maintaining rental income right up until completion. However, there are legal obligations, financial implications and communication tactics to consider. This article outlines some of the key steps and pros and cons and offers practical tips on handling a tenant who wants to purchase the home they are renting.

1. Tenant Rights and Legal Basics

When it comes to a landlord selling a house which is tenanted, tenants’ rights under the law ensure that an ongoing tenancy does not end simply because the property has been put up for sale. Serving a valid Section 21 notice typically requires at least two months’ notice, though this may change with further rental reforms which are currently in the legislative pipeline. Landlords are not obliged to accept a tenant’s offer to buy a property just because they are renting it. A landlord can list their property on the open market if they so wish. However, selling a BTL property to its current tenant can be simple if both parties can agree on price and timing.

2. Pros and Cons of Selling to the Tenant

Pros

• Savings on Agent Fees: Selling to the tenant without listing the property can potentially bypass estate agent sales commission (typically, up to 3% of the sale price [1]). However, if a letting agency introduced your tenant, check for a clause entitling them to a sales commission (often 1.5% –2.5% of the sale price [2]) if you sell to the tenant.

• Rental Income Continuity: You collect rent until completion, avoiding the void period typical of a vacant property sale.

• Streamlined Process: Fewer viewings and faster negotiations, as your tenant already knows the property.

• Reduced Fall-Through Risks: No chain means fewer complications that might derail the sale.

Cons

• Potentially Lower Price: Without broader market exposure, you may not achieve the highest possible offer.

• Financing Uncertainty: A keen tenant might still fail to secure a mortgage.

• Potential Complexity: Balancing the landlord-tenant relationship during a sale can become tricky if disagreements arise.

3. Possible Sale Steps

1. Confirm the Tenant’s Financing
   Request a mortgage decision in principle and proof of funds. This ensures that the tenant can be considered a realistic purchaser.

2. Establish a Fair Price
   Even if you aren’t publicly marketing the property, get a professional valuation. You can then negotiate a price that reflects market value while factoring in potential savings on fees.

3. Review Any Letting Agent Agreements
   If an agency introduced your tenant, check for a clause entitling them to a sales commission (often 1.5% –2.5% of the sale price [2]). Clarify any such liability before finalizing sale terms.

4. Engage a Solicitor Early
   A conveyancing specialist can handle the paperwork, advise on timing and help you coordinate ending the tenancy agreement with the sale contract.

5. Finalize the Sale
   On completion, the buyer pays the balance of the purchase price not already paid at initial exchange, ownership transfers, and any remaining rental deposit issues are settled.

4. Key Tax Considerations

• Capital Gains Tax (CGT):
  Capital gains on the sale of a BTL property are typically subject to CGT. From 2025 onwards, subject to your overall income, the taxable gain will be charged at 18% if you are a basic rate tax payer and at 24% if you are a higher or additional rate tax payer [3].

• Annual CGT Allowance:
  Each individual has a £3,000 annual exemption for 2024/25. Any taxable gain over that allowance is taxed.

• 60-Day Reporting Rule:
  HMRC requires you to file and pay any CGT due within 60 days of completing a residential property sale.

• Allowable Deductions:
  Original property purchase, costs such as stamp duty and solicitors’ fees, subsequent capital improvement expenses and selling costs can be offset against your gain for CGT purposes.  

• Mortgage Penalties:
  Check if any early repayment charges will be triggered on your buy-to-let mortgage, as these will reduce your net proceeds from the sale.

5. Communication Best Practices

Selling your BTL property to your tenant requires balancing professionalism with sensitivity:

• Clarity: If you are open to selling to them, let the tenant know promptly. If you need time to decide, communicate that, too.

• Transparency: Share the basics of your valuation process. Some landlords even show their valuation figures to support the asking price.

• Respect Rights: The tenant retains their right to quiet enjoyment, so follow notice requirements for valuations and inspections.

• Written Agreements: Summarize discussions in writing. This avoids confusion about key dates, pricing or deposit returns.

6. Common Pitfalls and How to Avoid Them

1. Verbal Agreements
   Always put agreed terms in writing. Verbal agreements can lead to disputes later.

2. Tenant’s Mortgage Collapse
   If the tenant cannot secure financing, you lose time. Verify their pre-approval before pausing other sale plans.

3. Unexpected Tax Liability
   Estimate CGT early to avoid a shock. Factor in allowances and deductions.

4. Timing
   Even an off-market sale can take weeks or months to complete. Plan realistically.

5. Letting Agent Fee Surprises
   Your letting agent may have a clause granting them sales commission if your tenant buys, so review any contracts thoroughly.

7. Conclusion

Selling a BTL property to the current tenant can work to the advantage of both parties if approached professionally. By confirming finances, agreeing on a fair price and finalizing legal details carefully, you can sell your property to your tenants without losing control of the process or rental income until completion. Be sure to budget for CGT, sales expenses and any early mortgage repayment charges; check for letting agent fee clauses; and communicate clearly. Done right, selling your property to a tenant can be faster, more cost-effective and less disruptive than a standard sale, creating a positive outcome for both parties.

FAQs

Q. Can a tenant legally buy the property they are renting from me?

A. Yes. There is no law preventing a tenant from purchasing the home they occupy, as long as both parties agree on the terms. You are not legally required to sell, but if you do, it can often be a straightforward transaction since the buyer already lives in the property.

Q. How do I ensure that the sale price is fair if I am not putting the property on the market?

A. Obtain at least one independent valuation (for example, from a surveyor or local estate agent). You can also review recent comparable sales in your area. While you may be able to save on estate agent fees, make sure you do not undersell. Some landlords split the cost savings with the tenant to arrive at a mutually beneficial price.

Q. What happens to the tenancy agreement once the property is sold?

A. If you and the tenant agree to end the tenancy at completion, you can synchronize the termination date with sale completion.

Q. Do I need to pay Capital Gains Tax (CGT) when selling my buy-to-let property to my tenant?

A. Capital gains on the sale of a BTL property are typically subject to CGT. From 2025 onwards, subject to your overall income, the taxable gain is charged at 18% if you are a basic rate tax payer and at 24% if you are a higher or additional rate tax payer. You must report and pay any required CGT within 60 days of completion.

Q. Should I still use a solicitor if I am selling directly to my tenant?

A. A conveyancing solicitor ensures that all legal aspects are handled correctly, from drafting contracts to clarifying the tenancy end date. They also check for any mortgage or title complications and help coordinate deposit returns and official notifications on completion.

Q. What if my tenant’s mortgage application falls through during the sale process?

A. You may lose time and need to restart the selling process if their financing fails. It is best to ask for a mortgage decision in principle and proof of funds early on, so that you do not pause your other marketing plans without the confidence that the tenant can complete the purchase.