Understanding Capital Gains Tax (CGT) on property sales
Capital Gains Tax is payable on gains made when selling assets such as stocks, shares, property, art, jewellery and other collectibles. In this article, we’ll explore when you’ll need to pay Capital Gains Tax on property sales and how to mitigate your CGT bill legally.
Understanding Capital Gains Tax
Capital Gains Tax was introduced by Labour Chancellor James Callaghan in 1965. Prior to this, capital gains were not taxed. One of the primary drivers for the introduction of CGT was the rapid increase in property prices after World War II. The Office of Budget Responsibility estimates that total CGT receipts in 2024/25 will be £15.2bn.
Many people have become accidental landlords after being unable to sell their properties and are therefore subject to capital gains tax when they do finally sell their rental property. It’s important to understand the impact of CGT on a second home as this can put a big dent in your financial situation.
Calculating gains CGT on property sales
CGT on property sales is only payable on the net gain you make when selling your property. Let’s do a quick calculation to illustrate this. You bought a property for £150,000 and spent £5,000 on purchase costs and £15,000 on a new kitchen. You sold the property for £250,000 and spent £5000 on selling costs.
| Sales price | 250,000 |
| Less costs associated with sale | (5,000) |
| Less renovation costs | (15,000) |
| Less purchase price | (150,000) |
| Less costs associated with purchase | (5,000) |
| Total gain for CGT purposes | 75,000 |
You cannot deduct regular maintenance costs or mortgage interest and you must keep records of any costs you deduct from your tax calculation in case HMRC wants to look at your information.
Capital gains tax rates and allowance
For 2024/25, the capital gains tax allowance is £3,000. This is the amount of capital gain you can make before you have to start paying CGT. The allowance was £12,300 as recently as 2022/23 so there has been a big reduction in a short period of time which has increased HMRC receipts significantly.
The rate of GCT you’ll pay depends on your marginal rate of income tax. If you pay basic rate income tax, you’ll pay CGT at 18% for property and 10% for other assets. If you are a higher or additional rate taxpayer, you’ll pay CGT at 24% for property and 20% for other assets.
Exemptions and Reliefs
However, there are some other exemptions and reliefs you can claim to reduce the amount of CGT payable.
Private residence relief
If you sell your main residence, you can get an exemption for all or part of the gain on sale. Private residence relief is calculated as:
Gains X Period of occupation of property/Period of ownership.
This means that if you have lived in the property the entire time you owned it, you will not pay any CGT.
Lettings relief
If you let out part of the property you are selling while living in the other part, you are entitled to claim capital gains tax lettings relief. This is calculated as the lower of:
Capital Gain attributable to the let-out part.
Private Resident Relief
£40,000
Transferring ownership
It may be possible to transfer ownership to your spouse if they pay a lower rate of CGT. It’s always worth seeking advice from a finance professional such as an accountant to ensure you mitigate your tax liability by taking advantage of all available reliefs and allowances.
Reporting and Paying CGT
You must report any capital gain on property sales to HMRC within 60 days of the sale. HMRC require you to supply details of:
- the address of the sold property
- how much you bought and sold the property for
- ownership dates
- whether you had lodgers or were absent from the property overseas
- costs associated with buying and selling
You are also required to pay any CGT due with 60 days of the property sale. For sales of other assets, gains are reported according to the same timetable as self-assessment.
If you are late reporting or paying your CGT on a property sale, you will incur a late penalty of £100 from HMRC. There are further penalties of £10 per day for each day late up to 90 days (max £900) and 2 further penalties of £300 or 5% of estimated tax owed whichever is greater if you are 6 months and 12 months late.
Frequently asked questions about CGT on property sales
Q: If I lived in my house before I rented it out, will I pay CGT?
A: You are entitled to private residence relief for the time you lived in the property plus the last 9 months of ownership (irrespective of whether you lived there or elsewhere)
Q: If I had a lodger while I lived in my house, will I have to pay CGT?
A: You are entitled to lettings relief as well as private residence relief. This means that if you rent out up to 50% of your property, you will not pay CGT. However, if you rent out a larger proportion of your property you may have a CGT liability. See our blog on capital gains tax lettings relief for more information.
Q: What is the 36-month rule for CGT?
A: If the owner of the sold property is in long term care or disabled and meets the conditions, they can benefit from a CGT exemption for the last 35 months of ownership.
Q: What is the 9-month rule for CGT?
A: All sellers receive a CGT exemption for the last 9 months of property ownership even if they were not living at the property during that time.
Q: Do I have to pay CGT if I inherit a property?
A: You’ll only pay CGT when you sell an inherited property and the ‘purchase price’ for the calculation will be the value at probate.
Q: What happens to any losses I make?
A: You can offset any losses against future gains and carry forward the loss indefinitely. You cannot carry back a loss to offset a past gain.
Minimising capital gains tax on property sales with Adams Accountancy
If you are unsure about how to calculate capital gains tax on property sales or would like us to check your calculation before you submit to HMRC, give us a call on 01322 250001 or complete our online contact form today. It’s best to avoid paying the incorrect amount of tax if possible, so a quick call can help you avoid this problem.
