This guide has been produced for information purposes only. As a mortgage broker, we're not able to offer tax advice.
How much Capital Gains Tax will you have to pay? It depends. In this guide, we’ll explain how Capital Gains Tax works on UK property and prepare you for when you decide to sell.
Not everyone has to pay Capital Gains Tax on UK property; but you might – and it may be more than you think. You can avoid the shock of any unforeseen tax bills by calculating how much you’re liable to pay. Sadly, this isn’t always easy to figure out. We’ll explain everything in a bit more detail, show you how to calculate Capital Gains Tax on property and guide you through the process of paying it.
The Topics Covered in this Article Are Listed Below:
- What Is Capital Gains Tax on Property?
- Do You Only Pay Capital Gains Tax on Buy-to-Let Properties?
- When Do You Pay Capital Gains Tax?
- How Much Is Capital Gains Tax on Property?
- How Do You Pay Capital Gains Tax?
- Capital Gains Tax on Overseas Property
- Are You Looking for a New Property Investment?
What Is Capital Gains Tax on Property?
Capital Gains Tax (CGT) is a UK tax you pay on a portion of the profit – or capital gain - you earn from the sale of various chargeable assets, including property or land that’s not your main residence. The amount you pay depends on your personal income and the profit you receive from the sale.
Do You Only Pay Capital Gains Tax on Buy-to-Let Properties?
You don’t only pay Capital Gains Tax on buy-to-let properties. You pay Capital Gains Tax on the capital gain you receive from the sale of other properties that aren’t your main residence, including:
- Buy-to-let properties
- Second homes
- Land
- Inherited properties
- Business premises
Will You Pay Corporation Tax Instead?
You pay Capital Gains Tax on investment property you own as:
- An employed individual
- An unemployed individual
- a self-employed sole trader
- an individual in a business partnership
You don’t pay Capital Gains Tax on property owned and sold by a limited company; you pay Corporation Tax which currently stands at 25% (2023/24). This is because any property you own is viewed as part of your business, not a personal investment.
When Do You Pay Capital Gains Tax?
Capital Gains Tax is payable on property the moment it’s sold. You can report it immediately, but you don’t have to officially pay the money until the 31st of January that follows the tax year in which you made your profit. It can take a while to complete a Capital Gains Tax form, so it is advisable to start reporting your gains straight away, even if you do not intend to pay it until later.
Example
You sold your property and made a capital gain from the sale on 10th April 2023, within the tax year ranging from 6th April 2023 – 5th April 2024. You must pay your Capital Gains Tax by 31st January 2025 to avoid any interest or penalties for late payment.
How Much is Capital Gains Tax on Property?
The amount of CGT you pay on property ultimately depends on 2things:
- The profit you make when you sell your property -i.e. your capital or taxable gains
- The rates at which you’re charged Capital Gains Tax
HMRC use your personal income to determine the rates at which you’ll pay Capital Gains Tax on property. They add your taxable gains to your income and see which Income Tax band you fall into the year you made your sale. You then pay Capital Gains Tax at the appropriate rates on the portion of your capital gain that’s taxable.
To work out how much Capital Gains Tax you’ll pay on your property, you must first work out your:
- Total taxable gain -i.e. the profit you’ve made from this investment
- Taxable gain minus any deductible expenses and the CGT allowance
- Your tax threshold and therefore the rates at which you’ll pay CGT
How to Work Out Your Total Taxable Gain
You can find your taxable gain if you:
- Take the amount you sold your property for
- Deduct the price you paid for that property in the first place
- The amount left over = total taxable gains or your net profit
You can substitute the current market value for the sale price of your property if you haven’t sold it yet.
Example
- You purchase a property for £100,000
- You sell the property for £400,000
- Your total taxable gain or net profit is: £300,000
We’ll keep using the same example throughout and continue to build on it, so you can see how everything works together.
Alternatively, you can use our Capital Tax Gains Calculator to help work out how much it may cost you.
What Expenses Can You Deduct?
You can deduct certain costs from taxable gains to reduce the Capital Gains Tax you pay on your property, including:
- Stamp Duty paid when buying the property
- Estate agents’ fees
- Solicitors’ fees
- Certain other buying and selling costs, such as a surveyor
- Costs for improvements to the property, e.g. an extension or kitchen upgrade
You can’t deduct:
- Costs for the maintenance of the property
- Mortgage interest
Capital Gains Tax Allowance on Property
The Capital Gains Tax allowance on property for 2023 - 2024 is £6,000. This means you don’t pay any CGT on the first £6,000you earn from the sale of your property.
Example
Following on from the previous example:
- Your total taxable gain or net profit is: £300,000
- Your taxable gains after your allowance is: £300,000 - £6,000 = £294,000
If your total taxable gains are under the Capital Gains Tax allowance, then you don’t need to report them to HMRC or pay CGT.
How to Work Out the Gains You’ll Actually Pay CGT on
To calculate the taxable gains after your expenses and allowance, you:
- Take your taxable gains
- Deduct any allowable expenses
- Deduct the Capital Gains Tax allowance
Example
Following on from the same example:
- You purchase a property for £100,000
- You sell the property for £400,000
- You spent £10,000 on Stamp Duty and agency fees
- You spent£50,000 improving the property
- Your total taxable gain or net profit is: £400,000 – £100,000 = £300,000
- Your taxable gains after your expenses is: £300,000 – (£10,000 + £50,000) = £240,000
- Your taxable gains after your expenses and allowance is: £240,000 - £6,000 = £234,000
Now you know your taxable gains after your allowable expenses and allowance, you can start to work out the rates at which you'll pay CGT on property.
It’s a little more complicated when you claim Private Residence Relief or Letting Relief, but we explain this below.
What Happens if You Make a Loss?
You can avoid paying as much Capital Gains Tax when selling property if some sales resulted in losses. These are called allowable losses and you deduct them from your profit when you work out your taxable gains. To reduce the Capital Gains Tax you pay on the sale of property for that year, you need to report your losses to HMRC in your Self-Assessment tax-return.
If your gains are less than the Capital Gains Tax allowance, then you don’t need to report them. You can carry them forward to the next tax year. Similarly, you can deduct unused losses from previous tax years. It’s always best to speak to your accountant. They can help you decide on the best course of action.
How to Work Out Your CGT Rates
HMRC use your Income Tax band to determine the rates at which you’ll pay Capital Gains Tax. They add your taxable gains to your personal income to see which tax band you fall into the year you made your sale.
The Income Tax rates are:
| Income Tax Band | Taxable Income 2023 - 2024 | Income Tax Rate 2023 - 2024 | Taxable Income 2024 - 2025 | Income Tax Rate 2024 - 2025 |
|---|---|---|---|---|
| Personal Allowance | Up to £12,570 | 0% | Up to £12,570 | 0% |
| Basic Rate | £12,571 - £50,270 | 20% | £12,571 - £50,270 | 20% |
| Higher Rate | £50,271 - £125,139 | 40% | £50,271 - £125,139 | 40% |
| Additional Rate | £125,140 and above | 45% | £125,140 and above | 45% |
The Capital Gains Tax rates on property are:
| Taxable Gains on Property 2023 - 2024 | Capital Gains Tax Rate on Property 2023 - 2024 | Taxable Gains on Property 2024 - 2025 | Capital Gains Tax Rate on Property 2024 - 2025 |
|---|---|---|---|
| Up to £6,000 | 0% | Up to £3,000 | 0% |
| £6,001 - £50,270 | 18% | £3,001 - £50,270 | 18% |
| £50,271 and above | 28% | £50,271 and above | 28% |
Example
Following on from the previous example:
- You earn £234,000in taxable gains after any deductible expenses and the CGT allowance
- Your annual salary is: £45,000
- Based on your salary only, you’re a basic rate tax payer:
- You pay 0% Income Tax on the first £12,570you earn
- You pay Income Tax at 20% on earnings above £12,570: (£45,000 – £12,570) = £32,430
- 20% of £32,430= (£32,430x 0.2) = £6,486in Income Tax
- You pay £6,486in Income Tax
- You add your taxable gains to your annual salary to reveal your earnings that year: (£234,000 + £45,000) = £279,000
- Your new income is above £50,270and so falls into the higher rate tax band:
- You pay 18% CGT on the taxable gains above £45,000 and up to £50,270: (£50,270- £45,000) = £5,270
- 18% of £5,270= (£5,270x 0.18) = £948.60in CGT
- You pay 28% CGT on the taxable gains on the amount above £50,270: (£279,000 - £50,270) = £228,730
- 28% of £228,730= (£228,730x 0.28) = £64,044.40 in CGT
- You add these together to reveal the total amount of CGT: (£948.60 +£64,044.40) = £64,993 in CGT
- You pay £64,993 in CGT and £6,486in Income Tax that year
Relief
There are certain reliefs that can further reduce the Capital Gains Tax owed on the sale of your property. These are Private Residence Relief and Letting Relief.
Private Residence Relief
Homeowners who sell their main residence don’t pay any CGT on their property. They receive Private Residence Relief.
You pay Capital Gains Tax when selling property that’s not your main residence, but you may be eligible for some Private Residence Relief if you lived in the property previously. This is known as partial relief.
If you’re selling a property that functioned as your main residence:
- You don’t pay any CGT for the time you officially lived in that property. You receive Private Residence Relief for that period
- You don’t pay any CGT for the final 9months you owned that property, regardless of whether you rented it out or not. You receive Private Residence Relief for those final 9months
If you’re selling a property that’s registered as your main residence and you let out part of it:
- You’re eligible for Private Residence Relief for the percentage of the home you occupy - e.g. you live in 60% of the property and let out 40%
The formulas to follow to work out which part of the gain is covered by Private Residence Relief and is extempt from CGT are:
Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months)
OR
Total gain (£) x Percentage ownership
Letting Relief
Letting Relief is only available to landlords selling property in circ*mstances which meet specific criteria. Letting Relief can reduce the Capital Gains Tax payable on a property by up to £40,000 of tax-free gains.
To qualify you must:
- Already qualify for partial Private Residence Relief, i.e. you previously lived in the property you’re selling
- Have let out part of the property as residential accomodation at the same time that another part of the property was your only or main residence
Since April 2020, you're only able toclaim Letting Relief if you live in the propertyat the time of its sale. You will need to share occupancy with your tenant when you sell the property to be eligible.
The amount of Letting Relief you can claim is the lowest of the following:
- The same as the amount of Private Residence Relief you’re going to receive
- £40,000
- The chargeable gain you make from the letting, i.e. the gain you make for the period you rented out the property
This means that, in addition to the Private Residence Relief you can claim, you’ll also receive Letting Relief. Letting Relief will take the form of one of the above 3 options, whichever is the lowest amount.
How Do You Pay Capital Gains Tax?
Paying Capital Gains Taxon propertyis quite straightforward. Basically, you need to work out your taxable gains and then, if it’s above the Capital Gains Tax allowance, you need to report them to HMRC.
You can report Capital Gains Tax in 2 ways:
- Instantly via HMRC’s "real time"CGT service
- Annually in a Self-Assessment tax return
If you opt to complete a Self-Assessment tax return, then you must register with HMRC. You also need to report your gain by 31st January in the tax year following the year you sold your property - or the 31st October if you send paper Capital Gains Tax forms.
You can complete a tax return yourself or hire an accountant to fill it out on your behalf.
CAPITAL GAINS TAX ON OVERSEAS PROPERTY
Capital Gains Tax still applies to properties overseas if you’re a tax resident in the UK. When you sell an overseas property and make a profit, you are required to report this to HMRC and you will likely have to pay CGT at the same rate as standard. Capital Gains Tax reporting is a legal requirement for any capital gains you make worldwide.
In many circ*mstances, you’ll also have to pay tax in the country where you sell the property. This may mean you’re taxed twice. If you have been taxed twice, you might be able to claim tax relief. The amount you get back will depend on the double taxation agreement between the UK Government and the foreign government.
The profits from selling an overseas property in a foreign currency will be calculated based on the exchange rates, both at the time you purchased the property, and the time you sold it. This means that even if you sell a property for the same amount as the purchase price in another currency, the exchange rate may have changed since you bought it. In this case, you might still have to pay Capital Gains Tax as you could have made a profit when the amount is converted into GBP.
For example, if you bought a property for $100,000 USD in 2010, this would have converted to around £62,000 GBP. If you then sell the property for $100,000 USD in 2023, this would be around £78,000 GBP. The amount due in Capital Gains Tax would be based on the profit in GBP: £78,000 - £62,000 = £16,000.
Are You Looking for a New Property Investment?
Now you’ve sold your property, you may be looking for something new. Our mortgage advisers can help you organise your new investment. Call us on 0330 433 2927 or send an enquiry.
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