When you’re looking to sell a residential property, there are a range of associated costs including some that you may not be aware of. One of these is the Capital Gains Tax. In this article, we’ll discuss what Capital Gains Tax is, if you are required to pay it and how you have to pay it.
What is Capital Gains Tax?
Capital Gains Tax is a tax that you have to pay on any profit made from selling an asset, which, in this case, would be a residential property.
It’s calculated by subtracting the original purchase price, the cost of any home improvements (including extensions and renovations but excluding regular maintenance costs), the cost of any estate agents’ and legal fees and stamp duty associated with buying or selling the property, and your Capital Gains Tax allowance from the price that the property was sold for (or the market value when gifted or inherited).
If the property was bought before April 1982 (and not gifted or inherited after that date), the ‘purchase price’ will be replaced by the market price of the property on March 1st 1982.
The tax is also relevant on profit made on any property that is ‘disposed’ of, either by transferring it to someone other than a spouse or charity, or making an overall profit on an insurance claim due to damage or destruction.
As property prices have risen dramatically over the last 30 – 40 years, the amount of profit that you have made could be quite substantial.
| Month and Year | Average house price |
|---|---|
| January 1980 | £19,273 |
| January 1990 | £58,250 |
| January 2000 | £84,620 |
| January 2010 | £167,469 |
| January 2015 | £190,665 |
| January 2020 | £231,940 |
| January 2021 | £249,690 |
| January 2022 | £272,738 |
| January 2023 | £285,739 |
| November 2023* | £284,950 |
Average UK house prices through the decades, land registry.data.gov.uk
*Statistics available up to November 2023 at time of publishing
Do I have to pay it?
At its simplest, the rule is that if the house you’re selling isn’t your primary residence (your main home), and you have made a profit from selling it, you will need to pay Capital Gains Tax. The only exceptions are:
-
If the profit is less than the Capital Gains Tax allowance.
-
You may still need to report gains as part of your tax returns even if covered by the allowance.
-
If you’re transferring the property to a spouse (and you have not separated or lived apart for the tax year).
-
If you’re gifting the property to a charity.
As stated, if the property is your primary residence, typically you won’t have to pay Capital Gains Tax at all as you’ll qualify for Private Residence Relief. There are a few exceptions though, including:
-
If you haven’t lived in the property for the entire time of ownership.
-
If you have rented out your property at any time during ownership (including renting to a lodger).
-
If you’ve used your property for any business use, either fully or partly.
-
If your property (including grounds) is larger than 5,000 sq metres.
-
If you’ve bought the property to make a gain only.
If the property isn’t your primary residence, and you’re not a limited company, you’ll need to pay Capital Gains Tax on any profit made. This includes on:
-
Second homes and holiday homes.
-
Inherited properties.
-
Buy to Let properties.
-
Properties used fully or partly for business purposes.
If you’re a limited company (or a club, co-operative or unincorporated association such as community group or sports club), you will not pay Capital Gains Tax when you sell a property for profit. Instead, you’ll need to pay Corporation Tax.
What do I have to pay?
For the 2024 / 2025 tax period, each individual’s Capital Gains Tax allowance is £3,000. This is the annual amount of profit you can make tax-free and, if the property is jointly owned, you can combine your Capital Gains Tax allowances, further reducing the amount that you’ll need to pay tax on.
Any profit made on residential properties over this allowance during the tax year will be taxed at 18% for basic rate tax payers and 24% for higher tax paying individuals.
As an example, if a property bought for, or acquired at a market value of, £100,000 is sold for £250,000 (and did not have any renovation or improvement), that would be an initial profit of £150,000.
Minus the £3,000 Capital Gains Tax allowance, that would leave a £147,000 gain that you’d need to pay tax on. At the basic rate of 18%, this would work out as £26,460.
You’ll need to report and pay your Capital Gains Tax to HMRC within 60 days of selling or the gifting of the property, from the day of completion. If you need help working out how much you owe, you can use the HMRC Capital Gains Calculator.
The information provided in this article has been created to help you understand some of the tax implications and exemptions regarding Capital Gains Tax. It is, however, not exhaustive and you should consult the government’s advice, and / or an accountant or lawyer specialising in property tax before deciding whether you are eligible to pay and the amount due.
The information contained in this article does not constitute tax advice.
Further guidance on Capital Gains Tax and selling residential property can be found on HMRC’s website using the links below:
All content factually correct at the time of publishing. Articles on our website are designed to be useful for our customers, and potential customers. A variety of different topics are covered, touching on legal, taxation, financial, and practical issues. However, we offer no warranty or assurance that the content is accurate in all respects, and you should not therefore act in reliance on any of the information presented here. We would always recommend that you consult with qualified professionals with specific knowledge of your circ*mstances before proceeding (for example: a solicitor, surveyor or accountant, as the case may be). Lending decisions are subject to an affordability/creditworthiness assessment. Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
