Capital Gains Tax on Property: What UK Property Investors Need to Know

Capital Gains Tax (CGT) on property can significantly impact your investment returns. Understanding the rules, exemptions, and planning opportunities is crucial for UK property investors. This comprehensive guide covers everything you need to know about CGT on property sales.

What is Capital Gains Tax on Property?

Capital Gains Tax is charged on the profit you make when you sell or dispose of property that has increased in value. It applies to the gain (profit) rather than the total sale proceeds.

CGT Rates for Property 2024-25

Property CGT rates differ from other assets and vary based on your income tax band:

Principal Private Residence Relief

The most significant CGT exemption for property is Principal Private Residence (PPR) Relief:

Full Relief

You pay no CGT if the property was your main home for the entire period of ownership.

Partial Relief

Relief is proportionally reduced if you:

• Used the property for business purposes
• Let out part of the property
• Had other main residences during ownership
• Left the property empty for extended periods

Final Period Exemption

The final 9 months of ownership always qualify for relief, regardless of whether you lived there.

Lettings Relief

Lettings Relief provides additional CGT exemption for properties that have been both your home and rental property:

Current Rules

• Maximum Relief: £40,000 per person
• Requirement: Property must have been your main residence at some point
• Calculation: Lower of £40,000, PPR relief gained, or actual lettings gain
• Shared Ownership: Relief is available per owner

Important Changes

From April 2020, Lettings Relief is only available if you shared occupancy with your tenant. Historical lettings before this date may still qualify under the old rules.

Business Asset Disposal Relief (Entrepreneurs' Relief)

Previously known as Entrepreneurs' Relief, this can apply to certain property disposals:

Qualifying Conditions

• Property must be used in a qualifying business
• You must own at least 5% of the business
• Ownership period of at least 2 years before disposal
• Relief limited to £1 million lifetime allowance

Rate

Qualifying gains are charged at 10% CGT rate instead of standard property rates.

Allowable Costs and Deductions

You can deduct various costs from your capital gain:

Initial Costs

• Purchase price of the property
• Solicitor fees and legal costs
• Survey and valuation fees
• Stamp Duty Land Tax paid

Improvement Costs

• Extensions and conversions
• New kitchens and bathrooms
• Central heating installation
• Structural alterations

Disposal Costs

• Estate agent fees
• Solicitor fees for sale
• Advertising costs
• Valuation fees

Special Situations

Inherited Property

When you inherit property:

• You acquire it at probate value (stepped-up basis)
• No CGT on the deceased's gains
• Your CGT liability starts from probate value
• PPR relief may apply if it becomes your main home

Gifted Property

Gifts between spouses/civil partners:

• No CGT at time of gift
• Recipient takes on giver's acquisition cost
• Combined ownership period counts for reliefs

Gifts to others:

• CGT charged on market value at gift date
• Recipient's base cost is market value
• Holdover relief may be available

Non-Resident Landlords

Non-UK residents face additional rules:

• CGT applies to UK property gains from April 2015
• 30-day reporting and payment requirement
• Different annual exempt amounts may apply
• Double taxation treaties may provide relief

CGT Planning Strategies

Timing of Disposals

• Annual Exempt Amount: Use each tax year's £6,000 allowance
• Income Management: Time disposals to stay in lower tax bands
• Spouse Transfers: Utilize both spouses' allowances and rates

Property Investment Structures

• Joint Ownership: Double annual exemptions
• Company Ownership: Different tax rules but complexity
• SIPP Property: Tax-free growth but restrictions

Improvement Timing

• Major improvements before sale reduce CGT
• Keep detailed records and receipts
• Consider splitting improvements across tax years

Record Keeping Requirements

Maintain comprehensive records for CGT purposes:

Essential Documents

• Purchase contracts and completion statements
• All solicitor correspondence and bills
• Receipts for improvements and repairs
• Estate agent details and sale contracts
• Professional valuation reports
• Stamp duty and tax payments

Digital Records

• Scan and store all physical documents
• Organize by property and tax year
• Keep backups in multiple locations
• Maintain records for at least 6 years after disposal

Reporting and Payment

Reporting Deadlines

• Property Income: Include in Self Assessment by 31 January
• Residential Property: Report within 60 days of completion
• Other Property: Report in Self Assessment return

Payment Schedule

• Residential Property: Pay within 60 days of completion
• Other Disposals: Pay by 31 January following tax year
• Installments: Available in certain circumstances

Common CGT Mistakes

Avoid these frequent errors:

• Failing to nominate main residence
• Not claiming available reliefs
• Inadequate record keeping
• Missing reporting deadlines
• Incorrect valuation of inherited property
• Not considering spouse transfers
• Assuming all improvements are deductible

Recent Changes and Future Considerations

Stay aware of ongoing changes:

• Annual Exempt Amount: Reduced from £12,300 to £6,000
• Lettings Relief: Restricted from April 2020
• Reporting Requirements: 60-day rule for residential property
• Non-Resident CGT: Expanded scope since 2015

Getting Professional Advice

CGT on property involves complex rules and significant financial implications. Consider professional advice if you:

• Own multiple properties
• Have complex ownership structures
• Are considering major transactions
• Need help with tax planning
• Face HMRC enquiries