Capital Gains Tax on Property: How It Works, Rates, Allowances & Ways to Reduce Your Bill

Capital Gains Tax is one of those taxes that many property owners know exists but few fully understand until they are faced with a potential bill. Whether you are selling an investment property, a second home, or a property that was once your main residence, understanding how CGT works is essential to making informed financial decisions. In this guide, we explain how Capital Gains Tax applies to property sales in the UK, the current rates and allowances, key exemptions, and practical strategies for managing your tax liability.

What Is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value. The tax applies to the gain — the difference between what you paid for the asset and what you sell it for — not the total sale price.

CGT applies to a wide range of assets, including shares, business assets, and property. For the purposes of this guide, we are focusing specifically on how CGT applies to property transactions in England and Wales.

It is important to understand that CGT is separate from stamp duty land tax, which is paid when you purchase a property, and from income tax on rental profits, which is an ongoing obligation for landlords. If you are buying a property, you can calculate your stamp duty liability using our stamp duty calculator.

Key point: You do not pay CGT when you sell your main home, provided certain conditions are met (see Private Residence Relief below). CGT primarily affects those selling second homes, investment properties, inherited properties, and buy-to-let properties.

Current CGT Rates for Property

The rates of Capital Gains Tax on property sales differ from those applied to other types of assets, and they depend on your overall income tax position:

• Basic-rate taxpayers — 18% on residential property gains
• Higher-rate and additional-rate taxpayers — 24% on residential property gains

Your tax band is determined by adding your taxable income and your capital gain together. If the combined total pushes you into the higher-rate tax bracket, the portion of the gain that falls within the higher-rate band is taxed at 24%, while the portion within the basic-rate band is taxed at 18%.

The annual exempt amount — each individual has an annual CGT allowance, which is the amount of gain you can make tax-free each year. For the 2025-26 tax year, this allowance is £3,000 per person. If you own a property jointly (for example, with a spouse), you can each use your individual allowance, effectively doubling the tax-free amount to £6,000 on a joint disposal.

The annual allowance was reduced significantly from £12,300 to £6,000 in April 2023 and then further to £3,000 in April 2024, making CGT planning more important than ever for property owners.

How to Calculate Your Capital Gains Tax Bill

Calculating CGT on a property sale involves several steps:

Step 1: Determine your gain. Subtract the original purchase price from the sale price. For example, if you bought a property for £200,000 and sold it for £350,000, your gross gain is £150,000.

Step 2: Deduct allowable costs. You can deduct certain costs from your gain, including:

• Purchase costs — stamp duty paid when you bought the property, solicitor fees, and survey costs
• Improvement costs — the cost of capital improvements that enhanced the property’s value (such as extensions, new kitchens, or structural work), but not routine maintenance or repairs
• Selling costs — estate agent fees, solicitor fees, and marketing costs associated with the sale
• Incidental costs — costs of obtaining a valuation for CGT purposes

Using our example: if your allowable costs totalled £25,000, your net gain would be £125,000.

Step 3: Deduct your annual exempt amount. Subtract the £3,000 annual allowance from your net gain: £125,000 - £3,000 = £122,000.

Step 4: Calculate the tax. Apply the appropriate rate based on your tax band. If you are a higher-rate taxpayer, you would pay 24% on £122,000 = £29,280 in CGT.

Reporting and payment deadlines: When you sell a UK residential property and there is CGT to pay, you must report the disposal and make a payment on account within 60 days of completion. This is done through HMRC’s online Capital Gains Tax on UK property service. Failure to report and pay within this window can result in penalties and interest charges.

Private Residence Relief: The Main Home Exemption

The most significant CGT exemption for property owners is Private Residence Relief (PRR), which means you do not pay CGT on any gain made when selling your main home, provided:

• The property has been your only or main residence throughout the entire period of ownership
• You have not let out any part of the property (beyond the letting relief allowance)
• You have not used any part of the property exclusively for business purposes
• The grounds, including the garden, do not exceed 0.5 hectares (just over one acre)

If you meet all these conditions, your entire gain is exempt from CGT, regardless of how large it is. This is why most people who sell their family home never encounter a CGT bill.

Partial Private Residence Relief applies when the property has been your main home for only part of the ownership period. In this case, the gain is apportioned based on the time it was your main residence versus the time it was not. Importantly, the final nine months of ownership always count as a period of deemed occupation, even if you had already moved out, provided the property was your main residence at some point.

For example, if you owned a property for ten years and lived in it as your main home for seven years before letting it out for three years, you would receive PRR for 7 years plus 9 months of the 10-year ownership period. CGT would apply to the gain attributable to the remaining 2 years and 3 months.

CGT When Selling a Buy-to-Let Property

Selling a buy-to-let or investment property is the most common scenario where property owners face a CGT liability. Since the property is not your main home, Private Residence Relief does not apply, and the full gain (less allowable costs and your annual exemption) is subject to CGT.

If you are a landlord considering selling an investment property, there are several planning points to consider:

Timing of the sale — if your overall income is lower in a particular tax year (for example, if you have reduced your working hours or taken a career break), selling during that year could mean some or all of the gain is taxed at 18% rather than 24%.

Using your spouse’s allowance — if the property is jointly owned, both owners can use their £3,000 annual exempt amount. If the property is in one person’s name, it may be possible to transfer a share to a spouse or civil partner before selling, as transfers between spouses are exempt from CGT. The spouse then uses their own annual allowance and potentially benefits from being in a lower tax band. However, this must be a genuine transfer of beneficial ownership, not a tax avoidance arrangement.

Capital improvements — ensure you keep records of all capital expenditure on the property, as these costs reduce your taxable gain. This includes extensions, structural work, new heating systems, and other improvements (but not repairs or maintenance).

Letting relief — this used to be a significant exemption but was substantially restricted from April 2020. Letting relief now only applies if you shared occupation of the property with a tenant at some point, which is relatively uncommon. The maximum relief remains at £40,000 per owner.

CGT on Inherited Property

If you inherit a property and later sell it, CGT may apply to any increase in value between the date of inheritance and the date of sale. The important point is that your base cost for CGT purposes is the property’s market value at the date of death (as established for probate), not the price originally paid by the deceased.

If the property has not increased in value between the date of death and the date of sale, there is no CGT to pay. If it has increased, the gain is calculated as the sale price minus the probate value, less any allowable costs.

If you move into the inherited property and make it your main home, Private Residence Relief will cover the gain for the period it is your main residence. If you let it out as a buy-to-let investment, the full gain will be subject to CGT when you eventually sell.

The interaction between inheritance tax (paid on the estate at death) and CGT (paid on any subsequent gain) can be complex, and professional tax advice is strongly recommended.

Strategies for Reducing Your CGT Liability

While you cannot avoid CGT entirely if you are selling a property that is not your main home, there are legitimate strategies to minimise your liability:

• Maximise allowable deductions — keep meticulous records of all purchase costs, improvement expenditure, and selling costs. Every pound you can legitimately deduct reduces your taxable gain
• Use both annual exemptions — if the property is jointly owned with a spouse, both of you can use your £3,000 annual allowance
• Consider timing — if possible, time the sale to fall in a tax year when your other income is lower, potentially keeping you within the basic-rate band
• Spread gains across tax years — if you own multiple investment properties, selling them in different tax years allows you to use your annual exemption each year rather than wasting it
• Offset capital losses — if you have made capital losses on other assets (such as shares or another property), these can be offset against your property gain
• Consider incorporation — some landlords with larger portfolios transfer properties into a limited company structure, where corporation tax rates and rules may be more favourable. However, the transfer itself can trigger CGT and stamp duty liabilities, so this requires careful analysis

If you are considering a property sale and want to understand the financial implications, our mortgage calculator and affordability calculator can help you model different scenarios for your next purchase.

How CGT Interacts With Your Mortgage and Getting Professional Advice

CGT does not directly affect your mortgage, but it is an important consideration in your overall financial planning when selling or restructuring property. For example:

• Selling to release equity — if you are selling an investment property to fund a deposit on a new home, your CGT liability will reduce the net proceeds available for your deposit
• Remortgaging — remortgaging to release equity from your main home does not trigger CGT, as you are not disposing of the property. This can be a tax-efficient alternative to selling an investment property. Use our remortgage calculator to explore this option
• Portfolio restructuring — landlords looking to reduce their portfolio should factor CGT into their decision-making. Selling properties with smaller gains first, or spreading sales across tax years, can significantly reduce the overall tax bill

Whether you are a first-time buyer entering the market, a homeowner looking to move, or a landlord managing a portfolio, understanding CGT is an important part of the bigger financial picture. For self-employed property owners, CGT interacts with your self-assessment tax return, making accurate record-keeping even more critical.

Capital Gains Tax on property can be complex, and the consequences of getting it wrong — whether through underpaying or failing to report within the 60-day deadline — can be costly. We always recommend seeking professional tax advice from a qualified accountant or tax adviser for property disposals.

At Option Finance, while we are mortgage specialists rather than tax advisers, we work closely with our clients to ensure that the mortgage and property aspects of their plans are fully aligned. Whether you are looking to sell, purchase, remortgage, or explore commercial property options, our experienced advisers can guide you through the process. We also help clients with adverse credit histories and can advise on the financial implications of different property strategies. Use our repayment calculator to model your future mortgage costs.

Get in touch today to discuss your mortgage needs and take the next step with confidence.