What is Capital Gains Tax?

For a lot of investors, property is a passion project, but for the majority, it is a way of achieving consistent, high returns. While property investment is one of the most resilient assets in the market and offers a wealth of opportunities, there are several taxes to consider – all of which could have implications for your returns. 

Capital Gains Tax (CGT) is one of the most important considerations for investors, especially for those with a shorter holding period and for investors who eventually want to sell their portfolio for a lump sum. CGT is a tax on the profit made when you sell an investment asset that has increased in value. In turn, this impacts the amount of money you receive from your portfolio or investment.

How Does Capital Gains Tax Work on Property in the UK?

CGT isn’t a tax that is exclusive to property, it’s applied to any and all investments. Regardless of whether your profits have been built from stocks and shares or buy-to-let property, this portion of the overall total will usually be subject to tax.

How much you are allowed to earn before paying CGT changed on 6 April 2023. The government cut the threshold from £12,300 to £6,000, and the allowance will be cut once more to £3,000 in April 2024.

This means, if your buy-to-let property has appreciated £5,999 in value, you won’t need to worry about paying CGT, but if your gains surpass your personal allowance, you’ll be taxed on the remaining profits. 

For example, if you come to sell and your property has made £30,000 more than what you paid for it, you’ll pay Capital Gains Tax on the remaining £24,000 – the actual amount you stand to pay depends on your income tax band. 

If you’re in the basic Income Tax band, you should expect to pay 18% on your profits (10% if it were to be a non-residential property). If you’re part of the higher Income Tax bracket, your gains will be subject to 28% CGT – or 20% if the gains were made on non-residential property.  

When Do You Pay Capital Gains Tax on Property in the UK?

For landlords that invest for consistent, long-term rental income and are less interested in selling, CGT will be less of a concern. 

On the other hand, if you’re looking to build a property portfolio and eventually sell it for a lump sum, or if you’re flipping a property, CGT should be your first consideration.

This is because CGT is paid on the sale of the property, once you have an accurate idea of how much profit you’ve made. More specifically, if your gains were made (from a residential property) after 6 April 2020, the HMRC expects you to report your profits within 30 days of the sale. 

However, if your gains are made before this period, there are different regulations to adhere to. For those whose profits were generated before April 2020, there is the option to either report your gains and pay immediately, or you can report these profits in a Self Assessment tax return the following year.

Do You Pay Capital Gains Tax on Inherited Property in the UK?

If you inherit a property and find yourself wanting to sell it instead of renting it out, you will need to consider CGT, but only if this addition means you’ll have two properties. If this is the case, you’ll need to nominate one as your primary residence. 

This means that when you come to sell the inherited property (or any property that isn’t your primary residence), you will pay CGT on the profits made on the sale. For those who want to avoid paying CGT, it’s worth considering renting out the property instead of selling it, which offers a consistent monthly income without the hefty tax.

Related: 5 Myths About Property Investment in the UK For Overseas Investors

How to Work Out Capital Gains Tax on Property in the UK?

To work out Capital Gains Tax on rental property in the UK, you’ll need to know how much profits you’ve made and which Income Tax bracket you fall into. 

For example if you fall into the higher Income Tax band and have made £150,000 on your residential property, the amount of CGT you stand to make can be worked out:

£150,000 – £6,000 (personal allowance) = £144,000

Lower Income Tax Band: £144,000 ÷ 100 x 18 (Capital Gains Tax threshold) = £25,920

Higher Income Tax Band: £144,000 ÷ 100 x 28 (Capital Gains Tax threshold) = £40,320

Do Overseas Investors Need to Pay Capital Gains Tax?

Overseas investors with rental property in the UK will usually be required to pay Capital Gains Tax at either 18% or 28%, but there is an opportunity for these investors to claim relief from this tax. 

Overseas investors have the option to claim relief from CGT where the property is occupied as their main residence. To qualify for this, the investor should live in the property for at least 90 days in a single tax year. 

For every tax year that the individual satisfies this criteria, the gain on the property is exempt from CGT. However, residing in the property for 90 days means the individual does risk becoming a UK tax resident which can incur extra costs.