Capital gains tax on property – where you stand
In this guide
- What is Capital Gains Tax?
- When do you pay it on property?
- How much is Capital Gains Tax on property?
- How to work out how much you pay on property
- How can I reduce Capital Gains Tax on property sale?
- Capital Gains Tax on sale of second home
- How to avoid Capital Gains Tax on inherited property
- How to avoid Capital Gains Tax on buy-to-let property
- How to avoid Capital Gains Tax on foreign property
What is Capital Gains Tax?
Capital Gains Tax is a tax payable on any profit you make when selling off key assets. These assets may include things like property, a business, shares or even smaller items like artwork or antiques.
When do you pay it on property?
Generally, you won’t have to pay Capital Gains Tax when selling your main residence, as you will qualify for Private Residence Relief, but you may be required to pay it on the sale of any other property.
There are some exceptions where you will be required to pay Capital Gains Tax on your main residence, such as:
- The property (including grounds) is larger than 5,000 square metres (just over an acre)
- You sub-let part of the property (having one lodger is permitted)
- Part of your home is used solely for business purposes (using a room as a temporary or occasional office is allowed)
- You bought the property purely to make a profit (eg. you’re a property developer)
- You have another property that could be considered your main residence
If any of these factors apply, you may have some tax to pay when you sell the property.
It’s also important to note that a married couple or civil partners can only count one property as their main residence. Any additional properties will be liable when sold.
Everyone has an annual tax-free allowance of £12,300, so Capital Gains Tax will only be payable on profit above that amount.
How much is Capital Gains Tax on property?
It is charged at two different rates. Any profit within the basic income tax band (£50,270 or less) will be charged at 18%. Any profit above the basic tax rate (£50,271+) will be charged at 28%.
How to work out much you pay on property
When working out how much tax you will owe, there are several things to deduct from the profit you’ve made. A simple sum to work out your tax liability is:
Property sale price
minus the Buying price
minus the Estate agent fees for sale and original purchase
minus the Solicitor fees for sale and original purchase
minus the Cost of any major and permanent improvement work eg. extension (usual maintenance and decorating etc. don’t count)
= taxable profit
How much of the profit will be taxed at the lower rate and higher rate will depend on your other taxable income for the year. You can use this Capital Gains Tax calculator to get a personalised breakdown of your liability.
How can I reduce the amount of tax I pay my on property sale?
One way to reduce the Capital Gains Tax on house sales is to ensure you use all the deductibles available in your liability calculations.
- Property advertising costs
- Property valuation fees
- Solicitor/conveyancing costs
- Survey fees
- Estate agent fees
- Auctioneer costs
- Stamp duty paid on original purchase
Joint ownership will also reduce the amount payable, as you will only be required to pay tax on your share of the profit. You can transfer ownership within a marriage or civil partnership without having to pay any tax, so that can be a great option. You will then have double the tax-free allowance when you come to sell.
Capital Gains Tax on sale of second home
Capital Gains Tax will be payable on any second home. It might be a holiday home, an inherited property or a former rental property. However you have come to own multiple properties, it’s important that you’re aware of your Capital Gains Tax liabilities.
How to avoid Capital Gains Tax on inherited property
If you want to sell an inherited property, you will be charged Capital Gains Tax on any increase in value between the time of inheriting it and the date of sale.
If you want to avoid paying any tax on an inherited property, you have two options:
- Sell the property as soon as ownership gets transferred to you to avoid any increase in value
- Make the property your main residence – this will mean there is no tax payable when you come to sell
If neither of these are practicable, you can reduce the amount of Capital Gains Tax payable by applying the deductions mentioned above. If possible, you can also explore transferring ownership to share it with a spouse to give you double the tax-free allowance.
How to avoid capital gains tax on buy-to-let property
Capital Gains Tax when selling buy-to-let property is similar to other situations where you would need to pay Capital Gains on residential property, and therefore the same steps can be applied.
Joint ownership with a spouse or civil partner will provide you with twice the tax-free allowance, taking it up to £24,600, and the same deductions can be made to your profit.
How to avoid capital gains tax on foreign property
If you’re planning to sell a foreign property, you may be unsure whether you’ll be required to pay Capital Gains Tax. If you’re a UK resident, you will be required to pay tax on any profits from the sale unless it is declared to be your main residence. You’ll need to make the declaration to the government within two years of purchasing the property. Whether this is a good move will depend on your housing situation back in the UK. If you declare your foreign property your primary residence, any UK property will be declared a second home and will therefore be liable for Capital Gains Tax when sold. It’s important to think through this decision carefully and consider which property is likely to make the greater profit throughout your time of ownership.
Unless you’re a financial adviser, Capital Gains Tax on property is something that you’re unlikely to be overly familiar with. It can feel confusing, but tools like the government’s calculator mentioned in this guide are available to help. It’s important that you research Capital Gains Tax exemptions and permissible deductions to ensure you don’t pay more on your property than is required, but independent financial advice should be sought if you’re unsure about your liabilities.
Find out more about:
- How does equity release work?
- How much do conveyancing fees cost?
- Selling a house with tenants
- Selling a buy-to-let property in 2023
- What is a buy-to-let mortgage?
- Landlord tax explained
- When’s the best time to sell a house?
- What is a down valuation?
- How to sell a house without an estate agent
- What to do if your house sale falls through