Capital Gains Tax on the Sale of UK Residential Property

Selling a residential property in the UK can be a significant financial event, but it’s important to understand the tax implications, particularly Capital Gains Tax (CGT). Whether you’re a homeowner, landlord, or investor, this guide will help you navigate the rules and ensure you’re compliant with HMRC requirements.

What is Capital Gains Tax?

Capital Gains Tax is a tax on the profit you make when you sell an asset that has increased in value. For residential property, this applies to:

• Second homes.

• Rental properties.

• Inherited properties (if sold).

• Properties used for business purposes.

Your main residence is usually exempt from CGT under Private Residence Relief (PRR), but there are exceptions.

How is Capital Gains Tax Calculated on UK Residential Property?

CGT is calculated on the gain you make from the sale, not the total sale price. Here’s how it works:

1. Determine the Gain:

• Sale Price: The amount you sold the property for.

• Purchase Price: The amount you paid for the property (including purchase costs like stamp duty and legal fees).

• Allowable Expenses: Costs of improvements (e.g., extensions, renovations) and selling costs (e.g., estate agent fees, legal fees).

• Gain = Sale Price - (Purchase Price + Allowable Expenses)

2. Apply Tax-Free Allowance:

• For the 2024/25 tax year, the CGT annual exempt amount is £3,000. This means you only pay tax on gains above this threshold.

3. Apply the Relevant Tax Rate:

• Basic Rate Taxpayers: 18% on residential property gains.

• Higher or Additional Rate Taxpayers: 24% on residential property gains.

Example Calculation

Let’s say you sold a rental property for £250,000. You originally bought it for £200,000 and spent £20,000 on improvements and £10,000 on selling costs.

• Gain = £250,000 - (£200,000 + £20,000 + £10,000) = £20,000

• Taxable Gain = £20,000 - £3,000 (annual exempt amount) = £17,000

• CGT Due:

  • If you’re a basic rate taxpayer: £17,000 x 18% = £3,060

  • If you’re a higher rate taxpayer: £17,000 x 24% = £4,080

Key Reliefs and Exemptions

1. Private Residence Relief (PRR):

• If the property was your main home at any point, you may qualify for PRR, which exempts part or all of the gain from CGT.

• You’re also exempt for the final 9 months of ownership, even if you weren’t living there.

2. Letting Relief:

• If you live in your home at the same time as your tenants, you may qualify for Letting Relief, which can reduce your taxable gain.

3. Transfer between spouses or civil partners:

• Married couples and civil partners can transfer assets between themselves without triggering CGT, potentially doubling the tax-free allowance.

Reporting and Paying CGT

1. Report the Sale:

• File a Capital Gains Tax on UK Property report within 60 days of completion.

• Use the HMRC online service to submit the report.

2. Pay the Tax:

• The CGT due must also be paid within 60 days of completion.

Tips to Minimise CGT

• Use Your Annual Exempt Amount: Plan sales to make use of your £3,000 tax-free allowance each year.

• Offset Losses: If you’ve made a loss on another asset, you can offset it against your property gain.

• Transfer Ownership: Consider transferring ownership to a spouse or civil partner to utilise their tax-free allowance.

• Invest in Tax-Efficient Schemes: Explore options like Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs) to defer or reduce CGT. can enhance your understanding of the evolving landscape and highlight best practices.

Conclusion

Understanding Capital Gains Tax on the sale of UK residential property is essential for anyone involved in property transactions. By knowing the rules, reliefs, and reporting requirements, you can minimise your tax liability and avoid penalties.

If you’re unsure about your CGT obligations or need help with reporting, we're here to help. Whether you have a quick question or need tailored advice, feel free to get in touch with us to speak to a tax expert.