Capital gains tax is the bill that arrives after a rental property sale, and for landlords who’ve held a property for a decade or more it can be substantial. The calculation is mechanical, the reliefs are well defined, and with a bit of planning around timing and ownership you can often reduce the figure. This guide sets out how the tax is worked out for a landlord who owns property personally, what you can deduct, the reliefs that might apply, the reporting deadline that catches people out, and a worked example so you can see the numbers. We’re property buyers, so treat this as a plain guide and confirm the specifics with an accountant before you sell.
The Basic Calculation
Capital gains tax is charged on the gain, which is the difference between what you sold the property for and what it cost you, after allowable deductions.
- Sale proceeds are the price you sell for, less the costs of selling: estate agent fees, legal fees on the sale and the EPC.
- Acquisition cost is what you paid for the property, plus the costs of buying it: stamp duty, legal fees, survey fees and any other professional costs.
- Improvement costs are capital expenses that added value or extended the property, such as an extension, a loft conversion or a new kitchen where none existed. Repairs and maintenance don’t count, because they’ll have been deducted from your rental income each year.
Gain = sale proceeds minus acquisition cost minus improvement costs.
From the gain you deduct your annual exempt amount, which is £3,000 for the current tax year, and then apply the rate.
The Rates For Residential Property
Gains on residential property are taxed at:
- 18% on the portion of the gain that falls within your unused basic rate band
- 24% on the portion above it
Your basic rate band is worked out after your other income for the tax year, so a landlord with a salary near the higher rate threshold will pay 24% on almost all of the gain. A landlord with modest income may get a meaningful slice at 18%.
Company-owned property is taxed differently, under corporation tax, and isn’t covered here.
Reliefs That Might Reduce Your Bill
Private Residence Relief
If you lived in the property as your main home at any point, the gain for that period is exempt, along with the final nine months of ownership regardless of whether you were living there. The exempt portion is calculated by time: if you owned the property for ten years and lived in it for four, roughly 40% of the gain plus the final nine months is relieved.
Lettings Relief
Once generous, this now applies only where you let out part of the property while also living in it. Landlords who moved out and let the whole property no longer qualify.
Losses
Capital losses from other disposals, in the same year or carried forward from earlier years, can be set against the gain. If you’re selling more than one property, timing a loss-making sale alongside a profitable one reduces the total.
Spouse And Civil Partner Transfers
Transfers between spouses and civil partners are free of capital gains tax. If you own a property alone and your partner has an unused annual exemption or unused basic rate band, transferring a share to them before sale can reduce the combined bill. This needs to be done properly and in advance, and it has consequences beyond tax, so take advice.
The 60-Day Reporting Deadline
This catches more landlords than anything else. When you sell a UK residential property and there’s tax to pay, you must report the sale to HMRC through the online property disposal service and pay the tax within 60 days of completion. That’s separate from, and in addition to, your annual self-assessment return.
Missing the deadline triggers automatic penalties and interest. Have your figures ready before completion so the return can be filed promptly. If you use an accountant, tell them the completion date as soon as it’s fixed.
A Worked Example
Say you bought a flat in 2012 for £150,000, paid £4,500 in stamp duty and fees, spent £10,000 on a new bathroom and rewiring that counted as improvements, and sold it in 2027 for £260,000 with £5,000 in selling costs. You never lived in it, and your salary puts you in the higher rate band.
- Sale proceeds after costs: £255,000
- Acquisition cost including fees: £154,500
- Improvements: £10,000
- Gain: £255,000 minus £154,500 minus £10,000 = £90,500
- Less annual exempt amount: £87,500
- Tax at 24%: £21,000
If the flat had been owned jointly with a spouse who was a basic rate taxpayer, the gain would be split, two exempt amounts would apply, and part of one share would be taxed at 18%, bringing the combined bill down noticeably.
Does A Cash Sale Change The Tax?
The tax calculation is the same however you sell. What a cash sale changes is the sale price, which is lower, and therefore the gain, which is also lower. The tax saving doesn’t offset the price difference, but it does narrow it, and it’s worth including in the comparison.
Where a cash sale does help is with timing. Because we can complete on a date you choose, you can place the disposal in the tax year that suits you, which matters if you’re spreading several sales to use more than one annual exemption or to keep more of the gain in the 18% band. If you’d like to sell your rental property with the tenants in place and control the completion date, we’ll make an offer within 24 hours, cover the survey, legal fees and EPC, and complete when you need us to. Our offers sit between 70% and 85% of market value, and we buy across England and Wales.
Planning Points To Raise With Your Accountant
Before you agree to a sale, it’s worth a short conversation on the following.
- Whether to complete before or after 5th April, depending on your income in each tax year
- Whether a transfer of a share to a spouse or civil partner is worthwhile
- Whether any capital losses are available to set against the gain
- Whether any period of your own occupation qualifies for private residence relief
- Whether you have records of all acquisition and improvement costs, since missing receipts mean a higher gain
FAQs
How much capital gains tax will I pay on a rental property?
Residential gains are taxed at 18% within your unused basic rate band and 24% above it, after deducting costs, improvements and the annual exempt amount. Most landlords with other income pay 24% on the majority of the gain.
What can I deduct from the gain on a rental property?
The purchase price, buying costs including stamp duty and legal fees, capital improvements, and selling costs including agent and legal fees. Routine repairs aren’t deductible because they were set against rental income.
When do I have to pay capital gains tax on a property sale?
Within 60 days of completion, through HMRC’s online property disposal service. This is a separate return from your annual self-assessment.
Do I pay capital gains tax if I once lived in the rental property?
Private residence relief exempts the gain for the period you lived there plus the final nine months of ownership. The rest of the gain is taxable.
Can I reduce capital gains tax by transferring the property to my spouse?
Transfers between spouses and civil partners are tax-free, and splitting ownership before sale can use two annual exemptions and two basic rate bands. It must be done properly and in advance.
Is capital gains tax lower if I sell to a cash buyer?
The rate is the same. The gain is smaller because the price is lower, which reduces the tax, but that reduction doesn’t offset the price difference. The main advantage is control over the completion date for tax-year planning.