Capital Gains Tax on investment property

Whether you’re a seasoned property investor or just getting started in the buy-to-let market, understanding the ins and outs of Capital Gains Tax can make all the difference when it comes time to sell.

In this guide, we’ll break down everything you need to know.

What is Capital Gains Tax?

Most investors will already be familiar with the concept of a Capital Gains Tax, but for clarity, we’ll quickly explain what it is, and how it applies to investment properties.

In short, if you purchase an asset and later sell it for a profit, you may have a tax liability on the “gain” – i.e. the difference between the purchase and sale price. This is known as Capital Gains Tax, or CGT, in the UK. CGT isn’t always applicable as it depends on the type of asset and how much you made.

For example, your main home is (generally) exempt from CGT, but a second home or an investment property is not. So, if you’re a buy-to-let landlord or property investor, and you’re selling a property that isn’t your main home, then you need to be aware of the rules regarding CGT.

Fortunately, that’s where this article comes in. In this guide, we’ll explain everything you need to know, including:

• The current CGT rates for property
• CGT on different types of property
• Calculating your property gains
• Reducing your CGT bill
• Reporting and paying CGT
• Frequently asked questions about CGT and property

CGT rates and thresholds for property – 2024/25 tax year

The variety of rates and thresholds can make CGT quite confusing. First, there are separate rates for different types of assets. In this article, we’ll focus exclusively on property, but you can check the government website for details on other assets, like personal items and stocks.

Even with property, the applicable CGT rate differs based on the type of property and your income tax bracket. This table summarises the rates for the 2024/25 tax year:

However, most people are entitled to the Annual Exempt Amount, which allows individuals to earn gains up to a certain threshold without paying CGT. For the current tax year, this amount is £3,000 (or £1,500 for trustees). The Annual Exempt Amount has been vastly reduced recently, with it cut down from a high of £12,300 a few years ago. Why is this important? It shows the tax-free allowance for capital gains can change quickly and drastically, so you should check it regularly.

How to calculate your property gains

Let’s say you’ve sold, or you’re in the process of selling, an investment property. How do you calculate the gains and figure out your tax liability? The calculation is quite simple. Here’s the formula:

• Capital Gain = (Sale Price− (Purchase Price plus Allowable Costs) −Annual Exemption
• CGT Liability = Capital Gain multiplied by Applicable CGT Rate

Here’s an explanation of each component:

• Sale price: The price at which you sold, or are selling, the property.
• Purchase price: The original price paid for the property.
• Allowable costs: Expenses that can reduce your taxable gain, such as:
  • Legal fees
  • Stamp Duty Land Tax
  • Estate agent fees
  • Capital improvements (like major renovations or extensions, not redecorating)
• Annual exemption: The CGT annual exempt amount (£3,000 for 2024/2025).
• Applicable CGT rate: Tax rate based on the type of property (e.g. residential or commercial) and the individual’s income tax bracket (basic rate, higher rate, or additional rate). See the table in the section above.

So how does this work?

1. First, subtract the purchase price and allowable costs from the sale price to find your capital gain.
2. Subtract the annual exemption from your capital gain.
3. Finally, multiply the result by the applicable CGT rate (18%/24% for residential property, 10%/20% for commercial property or land).

Imagine you’re selling a residential buy-to-let for £500,000, having bought it 10 years ago for £300,000.

You’ve made a profit of £200,000, but you’ve also spent £30,000 on allowable costs during that time.

Nonetheless, the remaining profit is more than enough to push you into a higher rate tax band, so your applicable CGT rate is 24%.

In this example, your CGT liability would be £40,080:

(£500,000−(£300,000+£30,000)−£3,000 = £167,000

£167,000×24% = £40,080

Reducing CGT on property

You may be wondering if there’s anything you can do to reduce your tax burden. Fortunately, there is.

Reliefs and exemptions

First, there’s a variety of reliefs and exemptions that you may be eligible for:

• Private Residence Relief: Reduces CGT if the property was your main residence for part or all of the ownership period. Your CGT liability is reduced proportionally based on how long the property was your main residence.
• Lettings Relief: Reduces CGT if you lived in the property at the same time as your tenants.
• Business Asset Rollover Relief: If you sell a commercial property (or any other business asset), and reinvest the proceeds into a new, qualifying business asset (e.g. another commercial property), then the gain is “rolled over”, meaning you won’t pay CGT until you dispose of the new asset.
• Business Asset Disposal Relief: If you dispose of a commercial property used in a business you own (e.g. as part of a business sale), then this relief can reduce the applicable CGT rate to 10% on the first £1 million of lifetime gains.
• Spouse Transfers: No CGT is due if a property is gifted to a spouse or civil partner. This allows couples to make full use of both annual exemptions and potentially reduce the rate of CGT if one partner is in a lower tax bracket.

Other strategies for reducing CGT

In addition to the tax reliefs above, there are other means of reducing CGT on a property sale:

• Make use of annual exemptions: If a property is jointly owned then both individuals can use their £3,000 tax-free allowances? 
• Consider tax-efficient ownership structures: Instead of owning a property personally, it can be beneficial to purchase and hold investment properties within a limited company. Limited companies do not pay CGT when a property is sold, they are instead charged corporation tax, which can be lower than the applicable CGT rates. Furthermore, limited companies qualify for tax relief on a wider range of expenses than individuals (such as mortgage interest payments).
• Time your disposal carefully: If you sell your investment property at a time when your income is lower (for example, during retirement), you could benefit from a lower income tax bracket and thus pay a reduced CGT rate.
• Using capital losses to offset gains: You can offset any capital losses from the sale of other investments against the gains made from your investment property to reduce the total taxable amount.

Reporting and paying CGT

So far, we’ve explained how you can calculate and possibly reduce your tax bill, so next we need to understand how you report and pay capital gains tax on investment property. When it comes to the sale of a residential property in the UK, you must report the capital gain within 60 days of completion. Fortunately, it’s easy to do. HMRC has an online portal for reporting gains from UK property. You’ll also need to include details of the sale in your self-assessment tax return (which is due by the 31 of January each year).

If you’ve sold a commercial property or land, there is no 60-day requirement. Instead, you can report the gain to HMRC either through your annual self-assessment or HMRC’s real-time capital gains platform (please note this is a different portal than the one for residential property).

Frequently asked questions

Do I need to pay CGT if I gift my investment property to my children?

Yes, unlike gifting property to a spouse, properties that are gifted to your children are subject to CGT. The tax is based on the property’s market value at the time of the gift. Learn more about the tax implications of gifting property to children.

What about investment properties overseas?

UK residents must pay CGT on gains from overseas properties. You may also be liable for CGT in the country where the property is located, but double taxation relief could reduce the overall tax burden.

How much is CGT on an investment property?

CGT rates on residential investment properties are 18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers. For other investment properties (e.g. commercial or land), rates are 10% (basic) or 20% (higher/additional).

Conclusion

As we’ve seen, CGT can significantly impact the profits on an investment or buy-to-let property. However, with the right strategies, there are ways to reduce your taxable gains.

If you’re selling an investment property, book a free consultation with our team of experienced CGT advisers. We can help you understand your liability, maximise your returns, and ensure you stay compliant with the latest regulations.