A Guide to Capital Gains Tax on Investment Property (UK)

As property values continue to fluctuate in the UK, it’s becoming more than necessary to understand the ins and outs of Capital Gains Tax (CGT) to maximise ROI.

There are several complex rules surrounding CGT, with various exemptions, calculations, and specific rates that depend on factors like asset type and the seller’s tax band. 

This introductory guide will help you understand the important aspects of CGT related to investment property, including when it applies, the exemptions that can reduce your tax liability, and calculating CGT.

What is capital gains tax (CGT)? 

Capital Gains Tax (CGT) is a type of tax that is charged on the profit made on the sale or disposal of specific assets. It’s not the total amount you receive from the sale, but the gain you realise compared to the original cost. 

CGT applies to both individuals and entities when they:

• Sell or exchange an asset to make a profit
• Give away or gift an asset and it has appreciated in value since the original purchase
• Sell an inherited asset for a profit
• Transfer properties that are not their main residence 

How does Capital Gains Tax apply to investment properties?

Investment properties are real estate assets purchased to earn rental income or benefit from capital appreciation rather than for personal use. This category includes residential rental properties, commercial properties, and properties held for investment reasons.

Here, CGT applies when you sell a property for a profit. Unlike primary residents who qualify for Principal Private Residence (PPR) relief and are exempt from CGT, investment properties cannot avail of this benefit. Hence, CGT is an important consideration for property owners. 

Here’s how capital gains tax applies to investment properties:

1. CGT liability on property disposal

When you dispose of investment properties, be it through sale or transfer, you must pay capital gains tax. Properties classified as your main residence do not qualify for CGT unless they were previously rented out or used for business purposes. Understanding this difference helps you evaluate your tax responsibilities.

While managing tax liability is crucial, consider implementing broader risk reduction strategies in your property investments.

2. Tax-free allowance

Tax-free allowance is the profit you earn from the sale of assets, including investment properties, without incurring CGT. In the UK, this annual exemption was reduced from £12,300 to £3,000 as of recent changes. Investors are only taxed on profits that exceed this allowance. This means landlords will be liable for CGT on a huge portion of their profits. 

3. Deductible costs and allowable expenses

These costs are associated with acquiring, maintaining, and selling an investment property. Such costs are deducted from the final profit, reducing the taxable gain. Only specific, allowable expenses are deducted from the profit before CGT is applied. Routine maintenance or repair costs are not deductible while acquisition and improvement costs that add value to property are considered.

4. Reporting obligations and compliance 

Reporting obligations require investors to report and pay CGT to HMRC when they sell an investment property. As of October 2021, sellers must report the profit made and pay the tax within 60 days of the sale. Failure to do so will result in penalties and interest. 

What is the current rate of Capital Gains Tax? 

For investment properties, basic-rate taxpayers are charged either 10% or 18%. Higher or additional-rate taxpayers are charged 20% or 24%. This rate applies depending on the seller’s total income, including their profits from the sale. 

From April 2024, the following CGT rates have been set into action:

1) For individuals:

• 10% and 20% for general gains, such as non-residential property and carried interest gains
• 18% and 24% for residential property gains 
• 18% and 28% for carried interest gains 

2) For trustees:

• 20% on general gains (non-residential property)
• 24% on residential property gains 

3) For personal representatives (managing an estate of a person who passed away):

• 20% on general gains (non-residential property or carried interest)
• 24% on residential property gains 
• 28% on carried interest gains

4) Gains that qualify for BADR are taxed at 10%.

When do you pay Capital Gains Tax on property?

These are the top 5 conditions when you would have to pay capital gains tax (CGT) on a property:

1. Selling land

You will have to pay CGT when you sell a land, both undeveloped or developed land. The profit you make on this sale of the land (not tied to your main home) is subject to CGT. 

The tax amount can increase depending on land value. Keep in mind that zoning or infrastructural changes increase your land value sharply. To decrease the amount of tax, you can deduct allowable costs such as land improvement or purchase fees to reduce the gain itself.

2. Selling a buy-to-let property 

Buy-to-let properties are residential properties purchased to rent out instead of living in. They are mostly sold after holding them for years, during which the values increase. Such higher gains also mean you must pay higher CGT. Property prices tend to appreciate over time. 

If you sell during a market house boom, your taxable gain could be high.

3. Selling business premises 

These are used for commercial purposes, such as offices, shops, or warehouses. For commercial properties, you can qualify for Business Asset Disposal Relief (BADR), which reduces CGT by 10% on gains. It has a lifetime limit of £1 million. To qualify for BADR, you must have owned the business for at least two years before the sale.

4. Transferring property due to divorce or civil partnership dissolution

Property transfers as part of a divorce or civil partnership dissolution means the legal process of reallocating ownership of property between partners as they separate. When transferring property in such cases, CGT applies if a gain is realised upon transfer. This happens due to appreciation in value during the marriage. However, this transfer can occur without immediate CGT implications if executed as part of the financial settlement.

5. Selling inherited property 

In this case, CGT applies to any increase in the property’s value from the time of inheritance to the time of sale. The chances of an increase in CGT are moderate as it depends on how long you have held onto the property, which increases its value. However, inheritance tax could also apply, complicating the tax situation. 

What are the exemptions and reliefs on Capital Gains Tax?

Here are the top exemptions and reliefs on capital gains tax for investment properties:

Name	Exemption/relief	Who can use it
Private Residence Relief (PRR)	Full exemption on gains for the period it was your main home; partial relief for the time it was rented out.	Homeowners selling their main residence.
Letting Relief	Up to £40,000 per owner; applies when renting out a main home.	Homeowners who rented out their main home.
Business Asset Disposal Relief (BADR)	10% tax rate on qualifying gains (up to a lifetime limit of £1 million).	Business owners or partners selling qualifying business assets.
Rollover Relief (Business Asset Rollover Relief)	Deferral until the new asset is sold.	Business owners reinvesting in new assets.
Holdover Relief	Gain deferred until the asset is sold by the recipient.	Business owners gifting qualifying assets.
Incorporation Relief	The gain is deferred until you sell the shares.	Business owners incorporating their business.
Relief for Gifts to Charities	100% exemption on the gains from the gift of property to charities.	Individuals gifting property to registered charities.
Spousal Transfers	100% exemption on gains from transfers between spouses or civil partners.	Married couples and civil partners.
Annual CGT Exemption	£6,000 for the 2023/24 tax year; the first portion of gains exempt from CGT.	All UK individuals selling assets.
CGT Exemption for Overseas Properties (for Non-Residents)	Depends on property ties; may vary by situation.	Non-UK residents with overseas property.
Main Residence Relief on Second Homes (Partial Relief)	Proportional relief based on the time lived in the property as a main residence.	Second home owners who previously lived in the property.
Negligible Value Claims Relief	Allows you to claim a loss for CGT purposes when an asset, such as a property, has become of negligible value.	Owners of property that has decreased in value.
Gift Hold-Over Relief	Gain deferred until the asset is sold by the recipient.	Individuals gifting assets to family or trusts.
Seed Enterprise Investment Scheme (SEIS) Reinvestment Relief	Deferral until SEIS shares are sold.	Investors reinvesting gains into SEIS shares.
Disincorporation Relief	Gain deferred until the asset is sold by the recipient.	Businesses disincorporating and transferring assets.
EIS Reinvestment Relief	Deferral until EIS shares are sold.	Investors reinvesting into EIS-qualifying companies.

How to calculate Capital Gains Tax on investment property?  

Here’s a simple 3-step process to calculate CGT on investment properties:

Step 1: Calculate the profit

To calculate the gain on the sale of investment property, determine the selling price. Add the purchase price along with the costs associated with it. Then, subtract the costs related to the sale.

Gain = Selling Price – (Costs of Acquisition + Sale-Related Costs)

👉 Learn more about raising capital for your property investment strategy in the UK

Step 2: Apply for reliefs and exemptions 

Check for any applicable reliefs or exemptions from the table above.

Taxable Gain = Gain – Reliefs/Exemptions

Step 3: Calculate and report CGT

Based on your income level (18% for basic rate, 28% for higher rate taxpayers), find the CGT rate. You can then multiply the taxable gain by the applicable CGT rate.

CGT owed = Taxable Gain x CGT Rate

How to avoid capital gains tax on investment property?

Capital gains tax (CGT) can catch you off guard, especially when you plan to sell an asset. It is inevitable, but there are some strategies you can use to minimise, or even avoid paying more tax than you need to. 

Let’s walk through 4 effective strategies that you can consider to reduce CGT on your investment property:

1. Make the property your primary residence 

This is probably the most straightforward way you can avoid CGT on a property. In the UK, you will not have to pay CGT on your main home thanks to the PRR rule. However, for the property to qualify as your primary residence, it must genuinely be your home.

Meaning, you need to live in it, and cannot claim it as your home last minute. You will need to plan and move into your second home before selling it. Be careful with the timing and consult an expert to ensure everything is legitimate.

2. Transfer ownership to a spouse 

If you’re married or in a civil partnership, consider transferring all or a part of the property ownership to reduce CGT liability. This can be very helpful when one partner is in a lower tax category.

When you transfer, the CGT you owe will be highly reduced as they’ll be taxed at a lower rate. This is perfectly legal but should be done well before the sale to abide by UK tax rules.

3. Use annual allowances

Every person has an annual CGT allowance. For 2024, this amount is £3,000 per person which doubles to £6,000 if you’re married or in a civil partnership. While this might not seem like a huge sum, it still helps!

You can spread the sale of multiple assets over multiple tax years to take advantage of your annual exemption. This reduces the total gains you are taxed on. Just make sure both names are on the deed to cut down on taxable gain, which saves you thousands.

4. Invest in EIS or ISA

The Enterprise Investment Scheme (EIS) is a government initiative. You can invest the gain into an EIS-qualifying company to defer CGT. This must be made within 1-3 years before the sale of the property. The deferred CGT will only be payable when you sell the EIS shares or if the company is disqualified.

ISA also offers tax-free growth, hence any gains made inside the ISA are not subject to CGT. 

What are the penalties for failing to report CGT? 

If you fail to report CGT on an investment property, you will have to pay penalties and some of them escalate the longer the payment is overdue. You must understand these consequences to avoid financial liability. 

Below are the possible penalties you might face if you miss CGT deadlines for property investments:

• Fixed penalty: £100 per return for missing the deadline, which is within 60 days from the property sale
• Daily penalty: £10 per day up to 90 days, maxing to £900
• 6 months late: 5% of the tax due or £300, whichever is greater 
• 12 months late: 5% of the tax due or £300, whichever is greater
• Late payment of CGT: 5% of tax due after 30 days, 6 months, and 12 months 

How Can Pluxa Property help you get more returns from property investment 

Understanding all the tax exemptions can be overwhelming, and missing out on them leads to unnecessary financial burdens. Worse, you might regret losing a big amount as savings.

The good news is that you don’t have to go through this alone—help is just a click away! Our team is well-versed in high-profit rental yields, tax implications, and more. 

We’ll guide you through the best strategies to minimise your CGT with personalised services that fit your unique situation. 

Contact us today.