Capital Gains Tax on property sales

Don’t get caught out by this unexpected bill - learn everything you need to know about Capital Gains Tax on the sale of residential property in this guide. We cover key questions, like where and when you have to pay it, what rate you’ll be taxed, and how to minimise your tax bill.

What is Capital Gains Tax?

CGT is a tax you pay when you sell or dispose of certain assets, like UK residential property or investments, and make a profit from the sale. It's based on the difference between what you bought the asset for (the cost) and what you sold it for (the proceeds).

When do I have to pay Capital Gains Tax on the sale of a property?

If your property is a main residence, you don't have to pay Capital Gains on any profits from a sale.

CGT on property sales only applies to:

• Second homes
• Buy-to-lets
• Business or inherited properties
• Plots of land larger than 5,000 square metres

If you are selling a second home, a buy-to-let, an inherited property, or a plot of land larger than 5000 square metres, CGT needs to be paid within 30 days of the sale (disposal).

You'll need to submit a residential property return (enclosing key details like the price differences and expenses) and pay online.

If you need to pay CGT, you can take advantage of certain allowances to help minimise your bill. Read on to find out how.

How much is Capital Gains on property sales?

HMRC has set the Capital Gains on property sales at 18% and 24%, depending on your income tax bracket:

• A basic rate taxpayer pays 18% on property sales
• A higher earner pays 24% on property sales

UK Capital Gains Tax rates in 2024

Tax rates change over time, but the current (2024) Capital Gains rates in the UK are as follows:

Scottish sellers should use the Scottish thresholds for their personal income tax calculations and the UK thresholds (above) for capital gains tax calculations.

What is the Capital Gains Tax allowance?

Both basic rate taxpayers and higher rate taxpayers get a tax-free allowance from CGT - it represents how much youcan make in profits per year before you need to pay CGT.

Does everyone get a Capital Gains allowance?

Yes, everyone gets a personal CGT allowance each year.

What is the current Capital Gains Tax allowance?

In 2024, the CGT allowance is £3,000 per person, after which you'll need to pay tax on any profits you make.

How to work out your Capital Gains Tax bill

In order to work out your final Capital Gains bill just follow these 3 steps:

Step 1: Calculate your taxable income:

• Deduct your personal allowance (currently £3,000) from your annual employment or self-employment income

If you earn more than £125,140, you’re not entitled to a personal allowance.

Step 2: Calculate your Capital Gain:

To calculate your Capital Gain...

1. Using your property's sale price, deduct the original price you paid for it (as well as estate agent fees, Stamp Duty, renovations)
2. Mortgage interest or upkeep costs like decorating aren’t allowed
3. If you make a loss, you don’t have to pay CGT as you’ve not gained anything to pay tax on
4. Next, deduct your CGT allowance (also known as the Annual Exempt Amount, currently £3,000)
5. You only need to pay tax on the gains made above this latest figure, similar to your personal allowance
6. If your gains are lower than the allowance, you don’t have to pay CGT

Step 3: Use these figures to calculate your Capital Gains Tax owed:

1. Combine the figures from steps one and two and use this year’s income figures in the table above to determine which Capital Gains Tax rate you fall into (18% or 24%)
2. Then, take the figure from step two and multiply it by the rate (0.18 or 0.28 as appropriate)
3. If your gains abridge both bands, you’ll need to calculate the correct rate for each portion: 18% for the profits reaching £50,270 and 24% on those thereafter
4. Or use an online CGT calculator which should do most of the hard work for you
5. GOV.UK has a handy Capital Gains calculator that you can use to determine your tax bill

What if I live in Scotland or Wales?

Even if you pay income tax at Scottish or Welsh rates on your salary, self-employed profits, rental income, or pension, you need to consider your total income against UK CGT rates.

Limited companies and CGT

The steps above are for private individuals and sole traders. Limited companies pay CGT using their business’ Corporation Tax rate. If this applies to you, begin from step two and substitute the relevant tax value in step three.

Six ways to minimise Capital Gains Tax on your property sale

Here are six ways you can avoid or minimise Capital Gains Tax you pay when selling property.

1. Use your personal deductibles in full

When calculating your gains (see step two above), remember to deduct ALL of your allowed expenses to accurately reflect the cost of selling your home. Otherwise, you effectively pay twice: once for the costs and once again in tax.

Don't forget: Your allowed expenses include any money you’ve invested in your property (like renovations), estate agent or solicitors’ fees from your initial purchase and sale, and your annual Capital Gains allowance.

2. Use your partner’s allowance

You can also use the remaining allowances of your spouse or civil partner, potentially doubling your tax-free deductible in any one year.

Remember to only use the appropriate deduction amounts you each have remaining. The figures deducted need to match your personal tax records with HMRC even if the total value you record is correct between you both.

It's worth noting that the transferring of assets between spouses for tax planning could have legal ramifications - talk with a tax specialist to make sure you're fully compliant with the law before going ahead!

3. Time your sale well

Tax years run from 6th of April to the 5th of April the following year. If you (or your spouse/partner) have used the majority of the Capital Gains allowance within a single year, you can delay your sale until after the end of the tax year.

Doing so will renew your CGT allowance in full which you can use to reduce your tax bill.

It's also worth considering other factors such as your personal circumstances and market conditions before deciding to go ahead with a sale. A property sale is a big commitment and you need to make sure you're ready for it, both financially and within your personal life.

Historically, the property market has been predictable - but a lot has changed in the past decade. It's worth keeping an eye on market conditions to make sure you sell when the time is right.

4. Nominate separate properties

If you’re unmarried, you and your partner can nominate separate properties as your main residences to HMRC. However, both your partner and yourself must live apart and update your home nomination within two years of moving into a new home together.

5. Use Private Residence and Letting Relief

You’re entitled to Private Residence Relief when selling your home for the time you lived there, including 9 months pre-sale (down from 18 months before 6th April 2020), even if you haven’t been living there at the time.

Additionally, you may be able to claim private residence relief on your portion of your property that you reside in if you let part of your home, and Letting Relief on the remainder.

6. Offset previous losses

Capital losses occur when the proceeds from the sale of an asset are less than its original purchase price or adjusted basis.

These losses can result from various circumstances, such as:

• Selling an investment property for less than its purchase price
• Selling shares or stocks for less than their purchase price
• Selling other capital assets, such as artwork or collectibles, for less than their purchase price

If you’ve lost money while selling an asset (property or otherwise), you can offset your current or future tax bill by the same amount.

Losses can be claimed for up to four years, so check your previous accounts and see where you can make savings.

Capital Gains Tax on second homes

So how does Capital Gains Tax work with second homes? The home you don’t apply Private Residence Relief to will be eligible for the tax if it’s ever sold in the future. You can change which residence is eligible by updating HMRC.

You must update HMRC within 2 years every time your combination of homes changes. You can use the same link above to do so.

Can I nominate a rental property as my main residence?

Unfortunately, it's not possible to designate a rental property as your primary residence. Once you start living in a rental property that you own, it ceases to be classified as such since you're no longer generating rental income from it.

However, if you lease part of your property, you can (partly) claim Private Residence Relief on the portion of your property you own and Letting Relief on the remaining let portion.

How do I know which property is my main residence?

This might sound like a silly question at first but it can be challenging in fringe cases.

Your main residence is the UK property you live in full-time. In other words, if you stay elsewhere for long periods of the year (like a second home or a holiday home), you’ll need to pay a proportional level of Capital Gains Tax if those assets are ever sold.

For example, if you owned a property for 10 years but only lived in it for five, you’ll pay CGT on 50% of the gains.

Capital Gains Tax considers the time you spend living in the property as a home and what you use it for. You’re only allowed to nominate a single property as your main residence and claim Private Residence Relief at any one time.

Can I have two primary residences?

No, you cannot have two primary residences. Based on the above criteria, you should end up with only one primary residence.

How long do you have to live in a house to avoid Capital Gains Tax?

To avoid CGT on your main residence, you must have lived in it throughout your ownership. While there's no specific duration required for designating a primary residence, residing in it for at least a year is typically advised to qualify for CGT exemption and Private Residence Relief (PPR).

What if I have to leave my main residence?

HMRC recognises that you may need temporarily to stay somewhere other than your main home and allows the following reasons for home absences:

• Any reason for absences up to 3 years (for example, completing major renovations)
• Up to 4 years if you’ve lived somewhere in the UK away from home for work reasons
• Any length of time for work outside the UK

You must have lived in the property before and afterwards (unless your work arrangements prevented you). If any of the above apply, and you have to leave your main residence, then you can claim private residence relief on these absent periods on your main property and avoid paying Capital Gains tax completely.

Capital Gains Tax on the sale of an inherited property

So far we’ve covered how CGT works for second homes and business properties like buy-to-lets, but do you pay Capital Gains tax on inherited properties?

• No - If you inherit a property, and it becomes your sole property, you don’t have to pay CGT.
• Yes - If your inheritance becomes the second property you own, you need to tell HMRC which property will become your main residence. You’ll pay CGT on the other property when you sell it.

Do I have to pay Capital Gains Tax on a gifted property?

No, you don’t have to pay Capital Gains Tax on gifted properties. This even extends to properties gifted to charity.

CGT is only due when you sell a second or third property and make a profit.

Can I deduct estate agent fees from Capital Gains?

Yes you can deduct estate agent fees from capital gains as well as other costs like legal/conveyancing fees, and Stamp Duty that you paid when buying the property.

What can you deduct from Capital Gains tax on property?

In your calculations you can deduct the following costs from Capital Gains tax on your property:

• Estate agent fees
• Solicitor fees
• Improvement works costs
• Costs involved in buying
• Costs involved in selling
• Costs involved in improving your property

However you can’t deduct the following costs:

• Maintenance costs
• Decorating costs
• Interest from loans

Can you buy property to avoid Capital Gains tax?

No you can’t buy property just to avoid Capital Gains Tax. Taxes on individuals’ capital gains are on sales, not purchases, of property. You’ll need to pay your Capital Gains tax on your profits before spending them.

In contrast, businesses are able to claim business asset rollover relief, allowing them to reinvest profits on property sales and delay CGT

Both individuals and businesses can gift properties to their spouse or charities. However, spousal gifts only delay Capital gains taxes as they must use the original purchase price when calculating the total gain value to be taxed.

Summary: Don't get bogged down by Capital Gains

Don’t let Capital Gains Tax be a hurdle to finding great property in your area. Whether you’re buying a second home or selling another, the tax doesn’t need to be complicated.

Make sure to speak with an independent financial advisor or solicitor for more information. They’ll be able to provide tailored advice to your situation and identify tax relief you may be entitled to.

Remember the buying and selling process and don't forget key costs like estate agent fees when calculating your capital gain.

Gain more with the right estate agent

Finding an experienced estate agent can be difficult: buyers want properties in promising areas while sellers want competitive offers and fast sales.

Enter your details in our checker below and we’ll compare the top-performing agents in your area for you to pick from. Choose between speed, accuracy and experience all in one dashboard.