Capital Gains Tax: what is it and how it works

Selling a property? You may have to fork out Capital Gains Tax (CGT) if you make a profit from it.

You typically don’t pay CGT when offloading your main home. That said, there are still circumstances in which you may need to pay the tax.

But you’re likely to have to foot a CGT bill when selling other types of property, such as a buy-to-let home.

Here we run through what CGT is and how it might impact you.

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In short, a Capital Gains Tax is a tax on any profit that you make when disposing of an asset, such as a buy-to-let property.

What do we mean by ‘profit’? It's usually the difference between what you paid for something and what you sold it for. It’s also known as ‘gain’.

Let’s say you bought a rental property for £450,000 and sold it for £550,000. You made a profit of £100,000. But sometimes a market value might be used instead. This might be if you inherited a property, for example.

‘Disposing’ means selling, giving away, swapping, or getting compensation for an asset.

The Capital Gains Tax (CGT) allowance is the amount of profit you can make from selling assets without paying any tax within a tax year. The CGT allowance in the UK for individuals is £3,000 for the tax year 2024/2025. That means you can realise capital gains up to this amount without having to pay any CGT.

For 'other trustees' the amount goes down to £1,500.

CGT thresholds have reduced significantly in recent years, falling from £12,300 in 2022-2023 to this year's threshold.

Find out more about you annual tax-free allowance at the Government's website.

It’s worth knowing that the annual CGT allowance is per person. So if you own a property jointly, you could effectively double the exemption to £6,000.

Make the most of it though - you can’t roll over any unused tax-free allowance into another tax year.

Remember that the CGT allowance can change. It was £6,000 per person in 2023/24 tax year - and has been £12,000 in previous years.

You pay Capital Gains Tax when you sell or 'dispose of' an asset that's gained in value.

It's the gain you make that's taxed, not the amount of money you receive.

CGT applies to different types of property, including:

• property that is not your main home. This could be buy-to-let property, second homes, business premises, land, and inherited property

• your main home in certain circumstances. This might be if you’ve rented it out, used it for business, or it’s very large (for more on this, see below).

Other assets come under the scope of CGT too, such as:

• many personal possessions worth £6,000 or more (except for your car). This could include antiques and jewellery

• shares that are not in an ISA or PEP

• business assets.

The amount of CGT you pay depends on a number of factors, such as your income and the type of asset you sell.

You pay a higher rate of CGT on profit from residential property than you do on other assets. Here’s a breakdown of CGT rates.

You may have profits from selling both residential property and other types of assets. In this case, you may be able to use your CGT allowance against the profits that would be charged at the highest rates.

You add together your taxable income and your taxable gain from selling property (or other assets that fall under CGT criteria). This determines which income tax band you fall into for the tax year.

Let’s run through how to calculate CGT:

• Work out your taxable income. Simply put, this is your income after your tax-free personal allowance and any other income tax reliefs have been taken into account.

• Work out your taxable gain (scroll down for more details on how to do this).

• Add together your taxable income and your taxable gain to get your total.

• Use this total to start working out which CGT rates you might need to pay.

It can get a bit tricky if the total pushes you into a higher tax bracket. In this case, you could end up forking out CGT at both basic and higher rates. So you might pay the basic rate up to the threshold, and the higher rate on any amount above it.

There’s various things to factor in when calculating your total taxable gain. Let’s take a look.

First of all, work out the profit you’ve made on each asset that you’ve offloaded during the tax year. Add the profits together.

Next, deduct your annual tax-free allowance.

Then knock off any other legitimate costs. These might include:

• allowable costs. Yes, you can deduct costs associated with buying, selling and improving your property. Think estate agents’ fees, surveyors’ fees, or even the cost of an extension or a smart new kitchen. But regular maintenance costs and things like mortgage interest don’t count

• losses that you’ve made when offloading other assets (for more on this, see below)

• tax reliefs that you qualify for (for more on this, see below).

If you sell something which you own jointly, you pay CGT on your share of the profit.

You can use this government calculator to work out your CGT bill on property.

There are special rules for calculating your profit in certain situations. This might be if:

• you live abroad

• you sell a lease or part of your land

• your property is subject to a compulsory purchase order. In other words, when your property is sold without your consent

• you sell property from the estate of someone who has died.

Not everything in life goes smoothly. You may find you make a profit when selling one property and a loss when disposing of another. Fortunately, you can use losses to effectively cut your bill. It works like this. When you report a loss to HMRC, it is deducted from your profit. It’s known as an ‘allowable loss’.

After this, if your total taxable profit is still above the annual CGT allowance, you can use unused losses from previous tax years. And if your total taxable gain drops down to the tax-free threshold, you can roll over the remaining losses to another tax year.

You’ve got time though. You can claim losses up to four years after the end of the tax year in which you sold the property.

It’s important to read all the small print as there are various rules when it comes to losses.

The good news is there are tax reliefs available that may cut your CGT liability in part, or in full. Here’s what to look out for.

Private Residence Relief

You don’t usually pay CGT when selling your main home. That's because you will automatically be given Private Residence Relief if all of the following apply to your property:

• it’s been your only home, which you’ve lived in since you bought it

• you haven’t rented part of it out (this doesn’t include having a lodger)

• you haven't used part of it solely for business

• the property and grounds total less than 5,000 sq m. This is equivalent to just more than one acre

• you haven’t bought it purely to make a profit.

Discover more about Private Residence Relief.

If you don’t meet all the criteria, you may still get partial relief under certain circumstances.

Let’s say you used part of your home exclusively for business purposes, or rented part of your home out to tenants. You would typically get relief for the proportion of the property that you lived in as your main ‘residence’.

You may get less Private Residence Relief if you lived away from your home. But you get full relief for the years that you lived in your home. You also qualify for full relief for the last nine months that you owned your home, even if you didn’t live there at the time.

If you own one home and you’re disabled or in long-term residential care, you could get full relief for the last 36 months of ownership.

If you’re lucky enough to own more than one home, note that you tend to get relief for one home in any period of time.

This can be a complicated area so let’s use an example from the government website to bring it to life.

Say you make a £120,000 profit selling the home you owned for 15 years. You lived in the property for 7.5 years and rented it out for 7.5 years.

You could get relief for the period of time that you occupied it (7.5 years) and the last nine months of ownership (even if you didn’t live there at the time).

So in total, you’d get relief for 8.25 of the years. That’s 55% of the time that you owned your home.

You’d get Private Residence Relief on the same proportion - 55% - of your profit. And you’re likely to be liable for CGT on the remaining 45% of the profit.

Letting Relief

If you rented out part of your home while you lived there, you may be entitled to Letting Relief. It applies to the chunk of property that is rented out. The relief is the lowest of either:

• the amount of Private Residence Relief you qualify for

• £40,000

• the profit you get from renting out part of your home.

Let’s refer to another example from the government website.

Assume you rented out a bedroom that’s equivalent to 10% of your home. You then make a £75,000 profit when selling the property.

Since 10% of your home was rented out, you’d get Private Residence Relief for 90% of the profit (£67,500).

Bear with us here! Because the remaining profit (£7,500) relates to a bedroom that was rented out, you may also be able to claim Letting Relief of £7,500. You would therefore have no tax to pay.

Relief for a home occupied by ‘dependent relative’

You may be able to claim relief if you sell a home provided for a ‘dependent relative’, such as an elderly member of the family.

Relief for a business asset

You could also be entitled to relief if you sell a property that’s used for business. This could cut or delay the amount of CGT you owe.

Gifts to spouses and charity

You don’t normally pay CGT on property you give or sell to your husband, wife, civil partner or a charity. So you could transfer a property to your spouse without footing a CGT bill. Bear in mind that this may not be the case if you’re separated and don’t live together at all.

Your partner may have to pay CGT on any profit if they sell the property at a later date. Their profit would be based on the difference in value between when you bought the property and when they sold it.

Inheriting property

You don’t usually pay CGT if someone dies and you inherit a property. But you may need to pay the tax on any gain if you come to sell it later on.

CGT is due from the point at which you sell an asset. If you sell a residential property, you must report and pay CGT to HMRC within 60 days.

And if you sell other types of assets, you need to report and pay CGT in the tax year after you’ve offloaded it if you use a Self Assessment tax return. You may be able to use the ‘real time’ Capital Gains Tax service.

You risk paying interest and a penalty if you fail to do so within the relevant timeframe.

Here’s what to do once you’ve done the sums.

Profit

Made a profit above the tax-free threshold? You can report and pay CGT online by using a Capital Gains Tax on UK property account. You can also use it to view or change a previous return.

If you’re registered for Self Assessment, you also need to include the details in your tax return.

Profit under the allowance

You don’t need to pay CGT if your profit is under the tax-free allowance. Hooray!

But you still need to report the profit in your tax return if:

• the total amount you sold the assets for is more than £50,000, and

• you’re registered for Self Assessment.

Loss

Made a loss? You can claim for the loss by including it in your tax return. Alternatively, you can contact HMRC.

There are ways you could potentially reduce your tax bill. It’s well worth seeking professional advice on how to do this effectively. In the meantime, here are some ideas on how you might go about it:

• use your entire annual tax-free allowance

• spread the sale of assets over a period of time to take advantage of the CGT allowance each year

• deduct allowable costs from taxable profits

• offset any losses against taxable profits

• make the most of tax relief.

How to avoid capital gains tax in 2024

It may seem like yet another thing to do but you can put yourself in good stead by keeping all records related to your property. These include things like receipts, bills, invoices, valuations, and contracts.

The government advises keeping records for ‘at least’ a year after the Self Assessment deadline. You’ll need to keep hold of them even longer if your tax return is late or HMRC looks into your case.

Businesses should keep records for five years after the deadline has passed.

Finally, a reminder that this is a guide only. CGT is a very complex area to navigate and it's highly recommended that you seek professional advice for your personal circumstances.