About Capital Gains Tax On Investment Property In The UK

Who is liable to pay Capital Gains Tax upon the sale of a property in the UK and how do you determine how much that tax likely to be?

Reporting & Tax

In this article, we provide information about Capital Gains Tax (CGT) of property in the UK, including who is responsible for paying it and how much tax you may need to pay based on your earnings.

CGT can come as a surprise to many individuals. It applies to profits earned from the sale of assets that appreciate over time, such as cars, art, and in this case property. Although CGT is typically not required when selling your primary residence, it may be necessary to pay when selling a buy-to-let property or a business premise.

What is CGT?

CGT is generally levied on any profits made through the resale of an asset. What this means is that if you, for example, purchased a property in 2010 for £200,000 and sold it in 2015 for £300,000 you would pay tax on the £100,000 profits garnered in that sale.

tax forms - capital gains tax

Tax rates

Basic-rate taxpayers pay 18% on gains they make when selling residential property, while higher and additional rate taxpayers pay 28%. Bear in mind that any capital gains will be included when working out individuals’ tax rates for the year, so some gains for basic-rate taxpayers will be taxable initially at 18% and 28% thereafter.

Commercial property gains at taxed at 10% and 20% for basic and higher/additional rate taxpayers accordingly.

Learn more about income tax rates.

Annual exemption

Individuals have a CGT annual exemption, meaning gains up to the annual exemption is not taxable. The CGT annual exemption is £12,000 in the current (2019/20) tax year.

What is deductible from the taxable gain?

The following costs can be deducted from the gain to reduce the amount that gets charged to CGT:

  • Costs associated with selling the property – such as estate agent and solicitors’ fees
  • Costs associated with purchasing the property – such as Stamp Duty, estate agents’ fees, and solicitors’ fees
  • Improvement and enhancement expenditure

Costs involved with improving or enhancing the property, such as paying for an extension or upgrading the kitchen, can be taken into account when working out the taxable gain.

Maintenance costs and mortgage costs are not deductible from any capital gains, although these can be used to reduce the income tax payable on any rental income.

Read our article on tax-deductible expenses from rental income for more information.

What tax reliefs are available?

The main two reliefs available when selling a residential property are Principal Private Residence (PPR) relief and lettings relief.

PPR relief

PPR relief is the relief that enables individuals to sell their homes without having to pay capital gains tax (CGT). To claim the relief, the property being sold must be the taxpayer’s main residence.

If a taxpayer sells their home and it was not their main residence for the entire time they owned the property then they may have to pay some CGT on the sale proceeds. This could be the case if, for example, an individual owned two properties and spent most of their time in one rather than the other or if they moved out of their home to develop it. In such cases, CGT is calculated by reference to the proportion of time that the property was not the taxpayer’s main residence.

Where a property has been an individual’s main residence at some point, the final 18 months of ownership is deemed to be a period of occupation regardless of whether the property was occupied in those final 18 months.

There are additional reliefs available for certain periods where an individual moves out of their home for certain reasons and then return at a later date.

Lettings relief

Where a property qualifies for PPR relief, lettings relief is given after PPR relief where part of the gain remains chargeable due to residential letting during a period of absence. Lettings relief is capped, depending on the amount of capital gain and PPR relief.

Tax changes from April 2020

As announced at Autumn Budget 2018, from April 2020 the government has made changes to PPR and lettings relief:

  • The final period exemption will be reduced from 18 months to 9 months.
  • Lettings relief will be reformed so that it only applies in circumstances where the owner of the property is in “shared-occupancy” with a tenant.

Final considerations

There are several other tax considerations when dealing with your buy to let properties. These include

  • Stamp Duty Land Tax. When you purchase a property in the UK valued above a certain amount you will be required to pay stamp duty. UK stamp duty is a one-off cost at the time of purchase and you pay the same stamp duty on a second home as you would on a buy to let investment property.
  • Council Tax. As a landlord, you will only pay council tax for your properties when they are vacant. Generally, it is the tenant’s responsibility. You can have a claim council tax as an allowable expense when you complete your self-assessment tax return.
  • Rental Income Tax. All income above the minimum taxable income threshold is taxable at your current income tax rate.

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We hope you found this blog interesting! However, we are not financial professionals, and as such the information in this blog is intended as general information and not advice. Nothing in this blog should be used as a substitute for competent legal and/or other advice from a licensed professional.