How to calculate Capital Gains Tax when you sell a property
Sell your second property quickly
WRITTEN BY: Tom condon ★ Digital Content Writer
How to calculate Capital Gains Tax when you sell a property
Sell your second property quickly
WRITTEN BY: Tom Condon ★ Digital Content Writer
Your capital gain is usually the difference between the purchase price of your property and the amount you received when you sold or disposed of it. This gain represents the profit you made from the increase in the property’s value.
If the sum of all your capital gains for the year exceeds the annual tax-free allowance, you are required to report these gains to HM Revenue and Customers (HMRC) and pay the applicable Capital Gains Tax.
The annual allowance helps mitigate the tax burden, but any gains above this threshold will be subject to taxation according to your income tax bracket. Property calculating and reporting your capital gains ensures compliance with tax regulations and helps avoid potential penalties.
Key takeaways:
Capital Gains Tax (CGT) is the tax you pay when you gift or sell an asset. If you sell a property for more than you paid, you may be subject to CGT on the capital gains. The current CGT rate for individuals in the UK is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
However, the annual tax-free allowance, also known as the annual exempt amount, allows you to generate up to £3,000 of capital gains tax-free each year.
If you are a UK citizen and sell a property that’s your main residence, you may be able to qualify for Private Residence Relief (PRR), which can reduce or eliminate the Capital Gains Tax owed. PRR is not available for estates used exclusively for business or rental properties.
If you sell a property that is not your primary residence, you must CGT on any capital gains made. You can reduce the tax owed by claiming certain expenses and allowances, such as costs associated with buying or selling the property or improvements made.
You can also defer the patent of Capital Gains Tax by reinvesting the proceeds from property sales into another qualifying asset.
We would always recommend that you keep accurate records of the purchase and sale of your property and any expenses incurred to calculate the capital gain and any applicable taxes owed accurately.
Here at The Property Selling Company, we understand that every property sale is unique, which is why we tailor our property selling process to you. We provide clear and honest communication throughout the selling process, ensuring you are fully informed at every stage.
Whether you’re selling a primary residence, a Buy To Let property, or a second home, we can provide customised advice and support to maximise your benefits and minimise your tax liabilities.
Calculating Capital Gains Tax (CGT) on the sale of a property involves several steps. Here’s a straightforward guide to help you understand the process:
The first thing you need to do is calculate the profit made on the sale, which can be done by:
Gain = Property Sale Price – Property Purchase Price.
Example:
Each individual has an annual exempt amount for Capital Gains Tax. For the tax year 2024/25, this amount is £3,000.
Taxable Gain = Gain – Annual Exempt Amount
Example:
Your Capital Gains Tax rate depends on your total income for the year. You need to determine whether you fall into the basic rate or higher rate band.
Income tax bands for 2023/24
Example
The rates for Capital Gains Tax on property are:
Since the income falls within the basic rate band, you apply the basic rate.
CGT Payable = Taxable Gain X Applicable Rate
Example:
If you have yet to sell your second property, you may want to consider choosing the right estate agent for you. Here at The Property Selling Company, we will cover all the usual house selling fees like estate agent and legal fees, which can significantly reduce your overall costs.
By minimising these expenses, you can offset the amount of Capital Gains Tax you need to pay, effectively equalising the cost of selling a house through online or traditional estate agents.
Not only this, but our team has over a century of combined experience in the housing market, and their expertise ensures that your property is marketed effectively and sold at a competitive price. Our knowledgeable team can also provide guidance on claiming expenses and reliefs, such as Private Residence Relief, to reduce your CGT liability.
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Capital Gains Tax applies to anyone who sells a second home or Buy To Let property in the UK and makes a profit from the sale. Here are some key scenarios in which CGT is applicable:
If you sell a second home or a Buy To Let property and make a profit, you are required to pay Capital Gains Tax. This tax is calculated on the capital gain, which is the difference between the sale price and the purchase price, minus allowable expense.
After someone dies, their estate – which includes money, possessions and property, is managed by an executor named in their will. The executor is legally responsible for managing the estate, which includes paying any taxes owed, such as Capital Gains Tax. If the deceased had made any capital gains, the executor must ensure that CGT is paid from the estate.
If you are a joint owner of a property and you sell it, your Capital Gains Tax liability will be split according to your ownership share. For example:
For CGT purposes, each joint owner is taxed on their share of the gain. Any available reliefs or exemptions, such as Principal Private Residence Relief, are applied on an individual basis and not to the property as a whole.
For total support, the Full house package costs £1499, including everything above, and everything below:
If you are looking to sell your property quickly, The Property Selling Company can help. We specialise in fast house transactions, often completing in as little as 28 days, all while helping you to achieve full market value.
This fast turnaround can be particularly advantageous if you’re looking to reinvest your proceeds into another qualifying asset to defer CGT.
Capital Gains Tax Owed = Taxable Gain x Applicable Tax Rate
For example, selling a house for £300,000 with a purchase price of £200,000 and £10,000 in allowable expenses results in a capital gain of £90,000. After dedicating the £6,000 annual exempt amount, the taxable gain is £84,000.
If the taxpayer is a higher rate taxpayer, the Capital Gains Tax owed at 28% would be £23,250.
Calculating the Return On Capital Gains (ROCG) involves determining the percentage increase in the value of an investment relative to the initial investment cost:
Return on Capital Gains = (Capital Gain / Initial Investment) x 100
The Capital Gain is the difference between the sale price and the initial purchase price of the investment, after accounting for any allowable expenses. The Initial investment is the original amount paid for the investment.
The Property Selling Company has extensive experience in property transactions and tax implications. They can provide expert advice on how to calculate your Capital Gains Tax accurately, ensuring you consider all allowable expenses and exemptions. This expertise can help you maximise your tax savings.
You will not receive a bill for Capital Gains Tax; instead you must determine if your total gains exceed your tax-free allowance. If your total taxable gains are above this allowance, you are required to report and pay Capital Gains Tax.
If you sold a residential property in the UK with a completion date on or after 27th October 2021, you must report and pay your Capital Gains Tax within 60 days.
If you own a second home or a Buy To Let property that has increased in value since you bought it, you will need to pay Capital Gains Tax. Generally, you do not have to pay Capital Gains Tax on your primary residence due to Private Residence Relief.
However, there are certain situations where you may need to pay CGT on your primary residence, including:
These situations can often be complex and open to interpretation. For further assistance, please contact our team or consult a financial advisor who can provide expert advice.
Capital Gains Tax on property is charged on the capital gains rather than the sale price. There are several strategies to reduce your Capital Gains Tax bill, but we highly recommend consulting a financial advisor to guide you through the process.
When calculating your Capital Gains bill, you can deduct certain costs, including:
You can also deduct costs for improving the property, such as renovations or major upgrades (like a new bathroom or kitchen). However, you cannot deduct costs related to the property’s upkeep like interest on a loan used to buy the property.
You can offset losses incurred from selling other assets. For instance, if you sell one property at a loss of £25,000, you can use that loss to offset gains from selling another property, thereby reducing your overall CGT bill.
Consider joint ownership with your spouse or civil partner. Each individual has a CGT allowance, so sharing ownership can effectively double your allowance. If your spouse is in a lower tax bracket, transferring all or part of the property into their name can also reduce your CGT bill.
If you have used some or all of your Capital Gains Allowance for the current year, consider delaying the sale of your home until the next tax year, as the allowance does not carry over. This strategy can help you maximise your tax-free gains. However, please seek the advice from a financial adviser, as you could be liable for penalties.
If you own multiple properties, you can nominate one as your main residence to reduce or eliminate the Capital Gains Tax on that property. The main residence usually benefits from Private Residence Relief, which can significantly lower your CGT liability.
If you have lived in the property while letting it out to tenants, you may be eligible for Letting Relief. This relief can further reduce your Capital Gains Tax bill, making it beneficial if you have rented out your home.
The Property Selling Company can help identify and document your deductible expenses, ensuring you maximise your allowable deductions. Our team can also assist with strategic planning, such as timing the sale of your home and exploring joint ownership options to minimise your Capital Gains Tax liability.
When you sell a second home or Buy To Let property, you’ll be subject to Capital Gains Tax.
Every UK resident has an annual Capital Gains Tax allowance £12,300 for the current tax year). If the gain on your second home is below this threshold, no tax is due.
This also means that if you have a joint ownership, that your Annual Allowance is also combined, effectively doubling it to £24,600.
If you own two or more properties, you can nominate the more valuable property as your primary residence to avoid paying Capital Gains Tax on that property.
This allows you to benefit from PRR, which may eliminate CGT on the property. You do not need to live there full-time but must legally nominate it as your main home.
However, if HM Revenues & Customs (HMRC) determines that a property isn’t your main home, you will need to pay Capital Gains Tax on any earnings in its value about your CGT allowance when selling a second home.
Yes, the length of ownership can affect Capital Gains Tax, but it’s not just about how long you’ve owned the property; it’s also about the nature and quality of your occupancy.
When you sell your home, you may be exempt from paying Capital Gains Tax if you can demonstrate that the property was your main residence. To qualify for this exemption, known as Private Residence Relief (PRR), you need to show that the property was genuinely your main home.
Legislation doesn’t precisely define ‘residence,’ but courts look for elements like permanence, continuity, and an expectation of continued occupancy. This means that just occasionally living in a property isn’t enough. The longer you live there, the stronger your case, although short and occasional residence can still qualify under certain circumstances.
To support a claim that a property is your main residence, utility bills and bank statements sent to the address over a continuous period can be very helpful. If you own more than one property, you can elect which one should be treated as your main residence for tax purposes, but HMRC scrutinises these claims, especially if there seems to be an intent to flip properties for profit.
Here are some case law examples:
Previously, there was a 36-month rule where no Capital Gains Tax was due on the sale of a property if it was your main residence for the last 36 months of ownership. This period has now been reduced to 9 months. However, if you own only one home, you can still claim full relief for the last 36 months under certain conditions.
In summary, while the length of ownership does impact Capital Gains Tax, the quality of your residence and the ability to provide solid evidence play important roles in qualifying for the exemption. The principle is generally “the longer, the better,” but genuine intent and continuous evidence are key factors that HMRC and courts consider.
The Property Selling Company can provide our expert advice on nominating your primary residence and leveraging PRR to minimise CGT. We work closely with conveyancers and a panel of solicitors to ensure we understand the nuances of tax laws, and help ensure your nomination is compliant with HMRC regulations.
For the 2024/25 tax year, Capital Gains Tax is charged at different rates depending on your income tax band:
The 6 year rule allows you to temporarily rent out your Principal Place of Residence (PPOR) for up to 6 years while still claiming the main residence exemption for Capital Gains Tax purposes.
Each 6 year absence period is treated individually, and there is no limit on the number of times you can use this exemption. However, the property must have been your main residence before you started renting it out.
The best way to sell a Buy To Let property is through a modern estate agent like The Property Selling Company. They can help you sell the property quickly, often within 28 days, covering all usual house selling fees, including solicitor costs. This can offset the amount of Capital Gains Tax you need to pay by minimising additional estate agency or legal costs.
If you sell a jointly owned property at a profit, each owner must pay Capital Gains Tax on their share of the profit. The gain is calculated by subtracting the property’s purchase price and any related expenses from the sale price.
The resulting gain is then divided according to each owner’s share. Each owner can also apply their annual exempt amount to reduce their taxable gain.
You don’t need to pay Capital Gains Tax if:
Certain strategies can help reduce or defer Capital Gains Tax, such as:
Yes, you will need to pay CGT, and you will need to pay Stamp Duty on a property if you purchase one after selling.
If you are buying and selling simultaneously, you will need to factor Stamp Duty into the transaction as it is based on the home value — and can end up being thousands of pounds.
However, not all properties will be subject to stamp duty. Stamp Duty usually applies to property purchases over £300,000 for first-time buyers or £125,000 for home-buyers.
If the property has been gifted to a civil partner, spouse or charity then you will not need to pay Capital Gains Tax. And, if you have inherited a property, the estate will pay the inheritance tax and no additional Capital Gains Tax is due unless the property is sold. The capital gain is calculated from the date you acquired the property.
The annual Capital Gains Tax allowance for the 2024/25 tax year is £3,000. In the last tax year, the CGT allowance was set at £6,000, which was down from £12,300 in 2022/23. You only pay Capital Gains Tax on gains exceeding this amount.
Yes, you must report and pay Capital Gains Tax within 60 days of selling most UK residential properties. If the property was part of a deceased person’s estate, this must be included in the report to HMRC. Use HMRC’s online Capital Gains Tax Service to report and calculate your gains.
You can avoid Capital Gains Tax on your primary residence due to Private Residence Relief (PRR). Additionally, transferring property to a spouse in a lower tax bracket can reduce CGT liability.
Selling a second home through a modern estate agent like The Property Selling Company is often the best way. We can offer you a fast sale (in as little as 28 days), help you achieve full market value, and we will cover the usual selling fees, including solicitor costs, which can help manage the Capital Gains Tax you need to pay by reducing overall transaction costs.
Yes, you will likely need to pay Capital Gains Tax (CGT) on a derelict property. If the property is derelict, it is probably uninhabitable and unmortgageable, making it challenging to convince HMRC that it has been your main residence. Consequently, you might not qualify for Private Residence Relief (PRR).
However, if you can provide evidence that this is your only property and you genuinely reside in it with the intention of refurbishing it, HMRC may consider allowing you to benefit from PRR.
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The Property Selling Company is part of The Property Buying Company Limited (Registration No. 08023018) is incorporated in England and Wales. Registered office: 4 Deighton Cl, Wetherby LS22 7GZ
