Here we answer some frequently asked questions to help you understand whether you owe Capital Gains Tax (CGT), how to report it and when you need to pay it.
Looking to sell, or have you recently sold a buy-to-let or second home property? It could be that you need to pay Capital Gains Tax (CGT). CGT needs to be reported and paid to HMRC within 60 days of disposal (and in some cases 30 days) when disposing of UK residential property. So, here’s everything you need to know to avoid missing the deadline.
Firstly, we need to define a couple of key terms:
Disposal – disposing of a property includes selling it, as well as gifting it. In short, any transaction that transfers the ownership from one person to another.
Base cost – this is the cost used to work out your capital gain and is not necessarily the same as the price you paid to acquire the property.
Which property disposals does Capital Gains Tax apply to?
If you have sold or disposed of a property that isn’t your main residential home and have made a profit, you could owe CGT. This could be business premises, land, property that you’ve inherited or been gifted, or a buy to let property.
While generally there is relief available for the sale/disposal of your main home, there are some circumstances where CGT may be due. For example, if you’ve used part of the property exclusively for business use, you haven’t lived in the property for the entire time you’ve owned it, or if it’s particularly large totalling over 5000 square metres.
HMRC also have different rules if you’re selling a UK property while you live abroad or are a registered company abroad.
Instances where you wouldn’t usually need to pay CGT are if the property has been gifted to a charity, your spouse, or civil partner. HMRC explain the exceptions and rules to this here. There are also certain reliefs available if the property was lived in by a dependent relative, or if it is classed as a business asset.
How does CGT work with Inherited or gifted property?
In the unfortunate event of a loved one’s passing, if you have inherited a property in their will, then the value of the property at time of death is included in their total estate. The value in the estate will become your base cost.
Capital Gains Tax doesn’t become due until you dispose of the property. At this point, you will need to calculate whether you have made a gain or loss on disposal, taking into account your base cost and all allowable expenses and reliefs.
With properties gifted to you before their passing, the CGT liability is worked out on the gain made between the date it was gifted and the date it’s sold. Unless a gift holdover relief claim was made – but that’s a topic for another day!
How do I work out what CGT I owe?
You’ll need to start by calculating the gain or loss that you’ve made on disposal, by working out the difference between your base cost and the amount you received.
Next, you’ll need to look at the allowances, deductions and rates.
Certain costs related to the property purchase and sale can be deducted from this amount to reduce your CGT liability, such as stamp duty and legal and estate agent fees. If you’ve made losses when selling other assets, you can also offset these, for example, if you’ve sold another property at a loss, that loss can be offset against this gain. However, the loss does still need to be reported to HMRC on your personal tax return within four years. Your accountant will be able to give you clarity on the ‘can and cannot’ when it comes to the deductions as there are a few blurred lines. For example, you COULD deduct the costs of some property improvements, but you COULDN’T, in some cases, deduct the mortgage interest.
You do have an annual CGT tax free allowance of £3,000 for the tax year 2024/2025, so it’s only for the taxable gains over this allowance (after adding all gains and losses for the year) that you’ll owe CGT on. It’s worth noting that this is your individual allowance, so if the property is jointly owned with your spouse, that could be an allowance of up to £6,000 between you.
The rates of CGT you’ll pay on residential property are higher than for the gain made on commercial property or other assets. For the tax year 2024/2025, this is 18% for basic-rate and 24% for higher and additional rate taxpayers.
In our full guide on Capital Gains Tax we explain these allowances further with the CGT tax rates for other assets too.
I owe Capital Gains Tax, what do I need to do, and when?
Once you have disposed of a residential property, you will have 60 days to report the gain to HMRC, as well as making payment for the estimated tax due. Any other property or asset disposals will be included in your personal tax return for that period.
Failure to submit your capital gains report and payment within these timeframes could see you incur interest and penalties from HMRC.
Where you are doing your own capital gains reporting, you’ll need to sign in with your government gateway ID, or create an account if you haven’t already done so. HMRC have full details here. If you’re unable to report this online, HMRC do have a downloadable form for completion.
You may decide to use an accountant to do this for you – they’ll be able to estimate the CGT that you’ll owe, apply the appropriate deductions and allowances, complete the report, and get this submitted to HMRC for you. You’ll still need to create a government gateway account, but your accountant will then advise how to give them authorisation to get the rest completed on your behalf.