Capital Gains Tax on Real Estate: Essential Guide for Investors

If you’re selling a property in the UK, understanding Capital Gains Tax (CGT) is essential. For investors, landlords, and even those selling second homes, this tax can significantly impact your returns. Whether you’re self-employed or employed, if you’ve been renting out property and are now thinking about selling, this guide will help you understand the intricacies of CGT and how it affects your financial plans.

In this blog we will explain everything you need to know about CGT, including what it is, when it applies and how to reduce your liability. With the help of our experts here at Kirkwood Wilson, you’ll be fully in the know of everything CGT related. 

What is Capital Gains Tax?

Capital Gains Tax is a tax on the profit made from selling an asset. In the context of real estate, it applies to the profit made from selling properties that aren’t your main home. If you own rental properties, second homes, or commercial real estate, CGT will come into play when you sell them. It’s important to note that CGT is charged on the gain, not the total amount of money you receive from the sale.

For example, if you bought a rental property for £200,000 and sold it for £300,000, the capital gain would be £100,000. This gain is what will be taxed under CGT.

When Does Capital Gains Tax Apply?

CGT is payable on the sale of any property that isn’t your primary residence. This includes:

• Rental properties
• Holiday homes
• Commercial real estate
• Inherited properties (unless you live in them)
• Properties you’ve never lived in as your main residence

It’s worth noting that if you’re selling your main home, you’ll likely qualify for Private Residence Relief, which usually exempts you from CGT. However, if you’ve let part of your home, or used it for business purposes, a portion of the sale may still be subject to CGT.

Capital Gains Tax Rates for Property

The rate of CGT you pay depends on your overall income. For example, for basic rate taxpayers, CGT on property is charged at 18%, while higher and additional rate taxpayers pay 24%.

It’s important to remember that these rates only apply to the gain after any exemptions or allowances have been deducted. Everyone is entitled to an annual tax-free CGT allowance, which is £3,000 for the tax year 2024/25. If your total gains from all assets, including property, exceed this threshold, CGT will apply to the amount over the allowance.

Reducing Your Capital Gains Tax Liability

There are several legitimate ways to reduce the amount of CGT you pay when selling a property. A chartered accountant, such as our Kirkwood Wilson experts, can help you identify which reliefs and allowances apply to your specific situation, but here are some common strategies:

Private Residence Relief (PRR)

As mentioned earlier, if you’ve lived in the property as your main home at any point, you may be eligible for Private Residence Relief. This could significantly reduce the amount of CGT you owe. Even if you haven’t lived in the property for the entire time you owned it, PRR may apply to the portion of time you used it as your primary residence. Additionally, if you’ve rented out the property at some stage, Lettings Relief may also reduce your CGT bill.

Lettings Relief

Lettings Relief is available if you let out a property that was once your main home. While this relief was more generous in the past, it has been restricted since April 2020. It now only applies if you share occupancy with the tenant. Despite this limitation, it’s still worth checking whether you qualify, especially if you’ve rented out part of your main residence in the past.

Offsetting Costs

You can deduct certain costs from the gain you make when selling the property. These may include:

• The original purchase price of the property
• Solicitors’ fees
• Estate agents’ fees
• Costs of home improvements (such as extensions or new kitchens)

These deductions can lower the overall profit and, therefore, reduce the amount of CGT you owe. It’s vital to keep thorough records and receipts for these expenses to ensure accurate reporting.

Spousal Transfers

If you’re married or in a civil partnership, transferring a portion of the property to your partner before the sale could be a tax-efficient option for you. Since transfers between spouses are generally exempt from CGT, this can help split the gain and utilise both partners’ CGT allowances, potentially reducing the overall liability. This can be especially beneficial if your partner falls into a lower tax bracket.

To explore all the options that could reduce your tax liability, it’s worth seeking the advice of a chartered accountant who specialises in property tax. Their expertise can ensure you’re taking advantage of every available relief and allowance.

Reporting and Paying Capital Gains Tax

One key point to bear in mind is that CGT on the sale of UK residential property must be reported and paid within 60 days of the completion date. You must also submit a CGT return to HMRC, even if no tax is payable.

Failure to report and pay CGT within the deadline can lead to interest charges and penalties. To avoid this, it’s essential to stay on top of your records. Many landlords find it helpful to engage bookkeeping services to ensure they keep accurate, up-to-date records of all their property-related expenses, income, and gains. This makes calculating CGT much simpler when the time comes to sell.

How a Chartered Accountant Can Help

Calculating CGT and ensuring you pay the correct amount can be complex, especially if you own multiple properties or have let out your home for part of its ownership. Engaging with our experienced chartered accountants can take the stress out of the process.

They can help you navigate the rules, ensure you claim all available reliefs, and advise on tax-efficient strategies. This is particularly important for entrepreneurs and investors who might have more complex property portfolios. Expert advice can ensure you minimise your tax bill and avoid costly mistakes. Accounting for entrepreneurs requires specialist knowledge, particularly in areas like CGT, where property transactions can have significant tax implications.

Whether you’re planning to sell a buy-to-let property or a second home, it’s essential to seek professional advice to ensure you meet your obligations and minimise your tax bill. For more advice on CGT and other tax matters, don’t forget to check out our tax blog for the latest insights.