Capital Gains Tax: the hidden costs of selling property by FreeAgent

When you come to sell one of your properties, you might expect to make a considerable profit on your initial investment. However, HMRC is also due a slice of that cake, which you’ll have to pay through taxes like Capital Gains Tax. 

So we’ve whipped up a quick guide to Capital Gains Tax for property: what it is, when you need to pay it and how much you’ll have to pay.   

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax you pay when disposing of certain large assets. These are generally assets which increase in value over time, such as properties, land or shares. You might pay CGT on personal items as well as items owned by your business. 

As a landlord, you’ll first need to consider whether your properties are owned and managed by yourself as a sole trader or whether they are owned by a limited company you control (if you’ve started a limited company to hold your properties, this is known as incorporation). If you’re an unincorporated landlord and you own your properties directly, you’ll almost certainly need to pay CGT when you sell any of your rental properties. 

If the properties are owned by a limited company, your company will almost certainly need to pay Corporation Tax on any properties it sells. This would take the place of CGT, as limited companies don’t have to pay CGT. 

When do you have to report and pay CGT?

As a landlord, you’re most likely to have to report and pay CGT when you sell a property that isn’t your main home. 

If you are selling your main home, you may be eligible for Private Residence Relief on all or part of your capital gain. If you have ever let out your home, either partially or completely, or used it for business, you will have to report your gains to HMRC, but may get partial relief. 

If you choose to incorporate by setting up a limited company to manage your property through, then you may have to pay CGT at the time you transfer property from your ownership to the company’s. 

How to calculate CGT on the property you’re selling

Luckily for landlords, you don’t pay CGT on the whole sale price of a property. CGT is typically due on the difference between the amount you bought the property for and the amount you sell it for. 

You would also get to deduct an allowance known as the ‘annual exempt amount’ against your taxable gains. This means you’ll only start paying CGT on gains above this amount. The annual exempt amount for CGT often changes in the new tax year in April. This year, it will change from £6,000 in 2023/24 to £3,000 in 2024/25.

A typical calculation, at its simplest, would look like this:

(Amount you are selling the property for minus selling expenses) minus (Original price you paid for the property plus any buying expenses i.e. fees) equals chargeable gain.

You’ll pay CGT on the chargeable gain minus the annual exempt amount. 

What are the current CGT rates for landlords?

Once you’ve worked out your chargeable gain, you need to know what rate that gain will be taxed at. This is dependent on your Income Tax bracket. These are the rates for residential property - other capital assets are taxed at different rates.

If you have been in the basic rate of Income Tax bracket, but adding your capital gain income pushes your earnings into the higher rate bracket, you would have to pay part of your tax at the basic rate, and some at the higher rate. 

We would recommend seeking the advice of an accountant to help you calculate your chargeable gain and the value of the CGT you’ll pay. These calculations can quickly become complex, especially if there are tax reliefs to factor in.

How to report and pay CGT 

HMRC won’t issue you a CGT bill after you’ve sold an asset - it’s your responsibility to figure out if you’ll need to pay CGT on a sale. For property, you’ll almost certainly have to. If you do need to pay, you’ll have to report your property sale to HMRC within 60 days of the completion date. 

You’ll need a few pieces of information for your report, including:

• the address and postcode of the property

• the date you bought the property and how much you paid for it

• the date you sold the property and how much you sold it for

• the value of the property when you bought it

• the value of the property when you sold it

• any costs associated with buying, selling or making improvements to the property

• any tax relief you can claim

• the capital gain calculation

Log in to your Capital Gains Tax on UK property account to report on and pay any tax you owe. You can also view and change any previous returns from this account. If it’s your first time signing in, you’ll need your Government Gateway user ID. 

You’ll also need to include any capital gains on your Self Assessment return. We’d recommend keeping your property sale records for at least a year after submitting your Self Assessment, in case HMRC requires any additional information to support your tax return. 

Note: The Capital Gains pages and the relevant box for this on the Tax Adjustments page are not currently supported by FreeAgent. If you need to report on capital gains, you won’t be able to submit your return directly through FreeAgent.

FreeAgent for Landlords

If you’re an unincorporated landlord looking for a better way to keep up with your daily property admin, FreeAgent for Landlords could be a great fit. You can record income and expenses against each of your properties, automate many of your admin tasks and see real-time tax calculations based on information in your account.

You can get a 30-day free trial of FreeAgent for Landlords and try out property management without the fuss.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.