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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 the property, and guide you through the process of paying it.

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 an 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 19% (2021 – 2022) and is due to rise to a maximum of 25% from April 2023. This is because any property you own is viewed as part of your business, not 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 following the tax year in which you made your profit.

Example

You sold your property and made a capital gain from the sale on 15th July 2020, within the tax year ranging from 6th April 2020 – 5th April 2021. You must pay your Capital Gains Tax by 31st January 2022 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 2 things:

  • 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 – e.g. surveyor 
  • Costs for improvements to the property – e.g. an extension, kitchen upgrade, etc.

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 the property for 2021 – 2022 is £12,300. This means you don’t pay any CGT on the first £12,300 you 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 – £12,300 = £287,700

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 – £12,300 = £227,700

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 the 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 uses 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 BandTaxable Income 2020 – 2021Income Tax Rate 2020 – 2021Taxable Income 2021 – 2022Income Tax Rate 2021 – 2022
Personal AllowanceUp to £12,5000%Up to £12,5700%
Basic Rate£12,501 – £50,00020%£12,571 – £50,27020%
Higher Rate£50,001 – £150,00040%£50,271 – £150,00040%
Additional Rate£150,001 and above45%£150,001 and above45%

The Capital Gains Tax rates on the property are:

Taxable Gains on Property 2020 – 2021Capital Gains Tax Rate on Property 2020 – 2021Taxable Gains on Property 2021 – 2022Capital Gains Tax Rate on Property 2021 – 2022
Up to £12,3000%Up to £12,3000%
£12,301 – £50,00018%£12,301 – £50,27018%
£50,001 and above28%£50,271 and above28%

Example

Following on from the previous example:

  • You earn £227,700 in 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 £12,570 you earn
    • You pay Income Tax at 20% on earnings above £12,570: (£45,000 – £12,570) = £32,430
    • 20% of £32,430 = (£32,430 x 0.2) = £6,486 in Income Tax
    • You pay £6,486 in Income Tax
  • You add your taxable gains to your annual salary to reveal your earnings that year: (£227,700 + £45,000) = £272,700
  • Your new income is above £50,270 and 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 = (£5,270 x 0.18) = £948.60 in CGT
    • You pay 28% CGT on the taxable gains on the amount above £50,270: (£272,700 – £50,270) = £222,430
    • 28% of £222,430 = (£222,430 x 0.28) = £62,280.40 in CGT
    • You add these together to reveal the total amount of CGT: (£948.60 + £62,280.40) = £63,229 in CGT
    • You pay £63,229 in CGT and £6,486 in 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 Lettings 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 9 months you owned that property, regardless of whether you rented it out or not. You receive Private Residence Relief for those final 9 months

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 are:

Total gain (£) x (Period you occupy the property as the main residence in months ÷ Total period of ownership in months)

OR

Total gain (£) x Percentage ownership

Example

Following on from the previous example:

  • Your total taxable gain from the sale of a property, before you deduct your allowance and expenses, is: £300,000
  • You bought this property in May 2009 and own it for 144 months (12 years) until May 2021 (May 2009 – May 2021)
  • It was your first main residence
  • You lived in it for the first 12 months that you owned it, from May 2009 – May 2010
  • You moved into another main residence at the end of those 12 months and kept this original property as a holiday home. You never let it out
  • You sell this original property (currently your holiday home) in May 2021
  • You’re exempt from CGT on the final 9 months of ownership
  • Your total occupation in months, including the CGT exemption period is: 12 + 9 = 21
  • You will pay CGT on the remaining months in which the property was unoccupied which are: 144 – 21 = 123
  • You receive Private Residence Relief on:
    • Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months)
    • £300,000 x (21÷144) = £43,750
  • Your chargeable gain, i.e. the amount you pay CGT on, is:
    • Total gain (£) x (Period property doesn’t function as your main residence ÷ Total period of ownership in months)
    • £300,000 x (123 ÷144) = £256,250
  • You deduct the CGT allowance and any expenses from your chargeable gain (as per the original example):
    • £256,250 – (£10,000 + £50,000) = £196,250
    • £196,250 – £12,300 = £183,950
  •  Then add the amount on which you pay CGT to your personal income:
    • £183,950 + £45,000 = £228,950
  • Your new income is above £50,270 and so falls within 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 =  (£5,270 x 0.18) = £948.60 in CGT
    • You pay 28% CGT on the taxable gains above £50,270 (£228,950 – £50,270) = £178,680
    • 28% of £178,680 = (£178,680 x 0.28) = £50,030.40 in CGT
  • You add these together to reveal the total amount of CGT: (£948.60 + £44,780.40) = £50,979 in CGT
    • You pay £50,979 in CGT

Find out more in our guide: Buy-to-Let Tax Changes.

Letting Relief

Letting Relief is only available to landlords selling property in circumstances that 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 the property as residential accommodation at some point. You may have let out the whole property or part of it

Since April 2020, you’re only able to claim Letting Relief if you live in the property at 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.

Example

The below example is the same as the previous one except that this time, you let out your property for a period after you moved out.

  • You own a property for 144 months, from May 2009 – May 2021
  • You lived in that property when you first bought it in for 12 months, from May 2009 – May 2010
  • You let out that property for 36 months, from January to 2013 – January 2015
  • It was unoccupied and functioned as a holiday home the rest of the time
  • You’re exempt from CGT on the final 9 months of ownership
  • Your total taxable gain from the sale of your property, before you deduct your allowance and expenses is: £300,000
  • Your total occupation in months, including the CGT exemption period is: 12 + 9 = 21
  • You receive Private Residence Relief on:
    • £300,000 x (21 ÷ 144) = £43,750
  • Your remaining gain, before Letting Relief, i.e. the amount you pay CGT on:
    • £300,000 x (123 ÷ 144) = £256,250
  • The lowest of the following 3 options is: £40,000
    • The same value as your Private Residences Relief: £43,750
    • £40,000
    • The chargeable gain you make from letting: £300,000 x (36 ÷144) = £75,000
  • You receive £43,750 in Private Residence Relief and £40,000 in Letting Relief
  • You pay CGT on your remaining chargeable gain which is: £300,000 – (£43,750 + £40,000) = £216,250

Note: the amount of chargeable gain remaining is before you deduct the CGT allowance or any expenses. You would deduct these and then add the figure to your personal income as shown in the previous examples, to calculate how much Capital Gains Tax you’ll pay.

HOW DO YOU PAY CAPITAL GAINS TAX?

Paying Capital Gains Tax on the property is 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 forms.

You can complete a tax return yourself or hire an accountant to fill it out on your behalf.