Capital Gains on Property: How Does Capital Gains Tax Work?

Capital Gains Tax (CGT) on property is the tax you pay on the profit made when you sell or dispose of a property that has increased in value since you acquired it.

If you own a buy-to-let property, second home, or land, understanding how CGT works helps you avoid overpaying and missing deadlines.

This guide explains how to calculate your tax on capital gains on property, when to pay it, and what affects your final tax bill.

Key points

• CGT applies to more than just selling property 🏠
  Capital Gains Tax can be triggered not only when you sell a buy-to-let, second home, or land, but also when you gift, transfer, or exchange a property, even if no money changes hands.
• Your taxable gain is often much lower than the sale profit 🧾
  You can deduct costs like Stamp Duty, legal fees, selling fees, and major improvements, but not repairs or mortgage interest, which can significantly change how much tax you owe.
• Your income determines your CGT rate 💰
  Gains are taxed at 18% or 24%, depending on whether they fall within your basic, higher, or additional rate band. This means the same sale can produce very different tax bills for different people.
• Timing and reporting rules are strict and easy to miss 📅
  UK property CGT must be reported and paid within 60 days of completion. Missing records or delays can quickly lead to penalties, interest, and unnecessary stress.
• Best way to stay on top: automate the admin 🚀

Instead of tracking costs, deadlines, and tax position manually, ANNA automatically records expenses, estimates tax in real time, and keeps you ready for CGT reporting. This way, you can avoid surprises and reduce the risk of overpaying.

What does Capital Gains on property apply to?

For property, CGT usually applies when you sell:

• A buy-to-let property
• A second home or holiday home
• A property you inherited and later sold
• Land, including development land

The key point is that you’re taxed on the gain, not the total sale price. So if you bought a property for £200,000 and sold it for £300,000, your gain is £100,000.

What counts as a disposal?

CGT is triggered by more than just the sale of a property. HMRC uses the term ‘disposal’, which covers several situations.

You may also need to calculate and report a gain if you:

• Gift a property to someone, including family members
• Transfer ownership, unless it’s to a spouse or civil partner
• Exchange it for another asset
• Receive compensation, for example, from an insurance claim

If you gift or transfer a property, HMRC may treat it as though you sold it at market value for CGT purposes. This means you could pay tax on the increase in value between what you originally paid for the property and its market value when you gifted it, even if no money changed hands.

Do you pay CGT on your main home?

In most cases, no. If the property you’re selling has been your main residence, you’ll usually qualify for Private Residence Relief. This can reduce your taxable gain to zero.

However, there are exceptions. You might still owe CGT if:

• You rented out part of the property
• You used part of it exclusively for business
• The property is very large, typically over 5,000 square metres of land
• You didn’t live there for the entire period of ownership

How Capital Gains Tax is calculated

Working out your CGT bill on property isn’t complicated once you break it into clear steps. The key is understanding what counts towards your gain, what you can deduct, and how your wider income affects the final tax rate.

Here’s a simple, step-by-step breakdown:

Step 1: Work out your total gain

Start with the basic calculation:

Sale price – purchase price = initial gain

In reality, your taxable gain is usually lower because you can deduct a range of allowable costs.

Allowable costs you can include

You’re allowed to reduce your gain by adding certain costs to your ‘base cost’ or deducting them from the sale proceeds. These typically include:

• Stamp Duty Land Tax (SDLT), paid when you bought the property
• Legal fees, both on purchase and sale
• Estate agent fees when selling
• Surveyor and valuation fees, if directly related to the transaction
• Incidental costs like advertising to find a buyer, costs of valuing to confirm title, or professional fees (excluding CGT calculation itself)
• Capital improvement costs, such as extensions, loft conversions, structural changes, adding central heating, etc.

These costs must be capital in nature, meaning they improve the property or add value over time.

What you can’t include

Not everything counts. HMRC draws a clear line between improvements and maintenance.

You can’t include:

• Routine repairs, like fixing a boiler or repainting walls
• General upkeep or wear-and-tear fixes
• Mortgage interest or finance costs

These are considered running costs, not capital expenses, so they can’t reduce your CGT bill.

In practice, your calculation will then look like this:

Sale price – (purchase price + buying costs + improvement costs + selling costs) = chargeable gain

Missing costs can mean you end up paying more tax than necessary. That’s why it’s important to keep track of everything you do to your property and organise your receipts if HMRC requests them as evidence.

Step 2: Deduct your CGT allowance

Once you’ve calculated your gain, the next step is applying your Annual Exempt Amount (AEA), which is the portion you can earn tax-free each year.

This allowance has reduced significantly in recent tax years, and now covers just £3,000.

The allowance applies per individual, not per property: you get one AEA to use across all your gains. Trusts (where assets are held on behalf of others) also have an allowance, but it’s lower, at £1,500.

There are a few key points to remember when it comes to your AEA:

• You can’t carry unused allowance forward to future years
• If you jointly own a property, each owner can use their own allowance on their share of the gain
• You can also deduct current or prior-year capital losses before applying the AEA.

After subtracting your allowance (and losses), what remains is your taxable gain.

Step 3: Apply the correct tax rate

Property gains are taxed differently from other assets, such as shares. The rates are higher, and they depend on your overall income position.

In the UK, Income Tax bands determine how much tax you pay, and they also affect how much CGT you pay on property.

There are three Income Tax bands:

• Basic rate band: For income from £12,571 to £50,270
• Higher rate band: For income from £50,271 to £125,140
• Additional rate band: For income above £125,140

Current CGT rates for residential property are:

• 18% for any part of the gain that falls within your basic rate band
• 24% for any part that falls into higher or additional rate bands

In some cases, a single property sale can push part of your gain into a higher tax band, increasing your overall tax rate.

Example: A more detailed breakdown

Here’s a breakdown of a realistic example with a bit more depth:

Imagine that you:

• Bought a buy-to-let property for £200,000
• Paid £3,000 in Stamp Duty and £2,000 in legal fees
• Spent £10,000 on a kitchen extension
• Sold the property for £300,000
• Paid £5,000 in estate agent and legal fees when selling

Here’s a breakdown of how to calculate your CGT:

1. Calculate your gain

Total costs:

• Purchase price: £200,000
• Buying costs: £5,000
• Improvements: £10,000
• Selling costs: £5,000

Total deductible costs = £220,000

Gain:

£300,000 – £220,000 = £80,000

1. Apply your allowance

Assuming an allowance of £3,000:

£80,000 – £3,000 = £77,000 taxable gain

1. Apply tax rate

If you’re a higher-rate taxpayer:

£77,000 × 24% = £18,480 CGT

If you’re a basic rate taxpayer, it’s a bit more nuanced. Your gain is split across tax bands – the portion that fits within your remaining basic rate band is taxed at 18%, while any amount above that is taxed at 24%.

So in practice, you may pay a mix of 18% and 24%, depending on your total taxable income.

When do you need to report and pay CGT?

For UK residential property, the reporting rules are much stricter than for other assets.

You must:

• Report the sale within 60 days of completion
• Pay an estimate of the CGT owed within the same 60-day window

This is done through HMRC’s UK property reporting service.

There are some important details to know here:

• The 60-day clock starts from the completion date, not the exchange date
• You need to estimate your tax bill, even if your final income for the year isn’t confirmed yet
• You’ll still need to include the gain in your Self Assessment tax return later, if you complete one

Missing this deadline leads to late filing penalties and interest on unpaid tax, so it’s not something you can leave until the end of the tax year.

Why planning ahead matters

By the time you actually sell a property, most of the factors that shape your CGT bill are already set.

Planning ahead has many benefits to the entire process, such as:

• You avoid guesswork when calculating your gain: If you leave everything until the end, it’s often difficult to reconstruct years of financial activity. Planning ahead means your figures are clear and complete, so you’re not relying on rough estimates that could lead to overpaying tax.
• You reduce stress during the sale process: Selling a property already involves legal, financial, and time pressures. When your records and tax position are organised in advance, you’re not scrambling to meet deadlines or double-checking numbers under pressure.
• You stay in control of deadlines and obligations: CGT reporting comes with tight timeframes. Planning ahead ensures you know what’s required and when, rather than discovering obligations after the fact.

ANNA – The simpler way to stay on top of CGT and property tax from day one

Trying to dig up old contracts and receipts to calculate your CGT will quickly have you drowning in admin.

Instead of managing it manually, ANNA keeps everything organised in the background from the moment you sign up.

Here’s how ANNA helps with your CGT:

• Automatic expense tracking that builds your CGT position over time: Every relevant cost is recorded and categorised as it happens. So, when you sell your property, you won’t need to remember what you spent years ago; your records will already be complete.
• Real-time tax visibility, not last-minute calculations: Your overall tax position updates continuously, so you can understand the potential impact of a property sale before making a decision, not after.
• Smart pots to prepare for large tax bills: Property gains can lead to significant one-off tax payments. ANNA helps you set money aside gradually, so you’re not caught off guard when payment is due.
• Deadlines handled without the stress: With tight reporting windows like the 60-day CGT deadline, missing a date can be costly. ANNA keeps track of key deadlines and reminds you what needs to be done, and when.
• A built-in UK business account to keep everything connected: With cash flow, invoicing, and automated bookkeeping, your income, expenses, and tax position are always aligned, no need to juggle multiple tools.
• Ready for Making Tax Digital (MTD): As tax reporting becomes more frequent, ANNA keeps your records continuously updated, so you’re always prepared for submissions without extra work. Also, if you register with ANNA now, you’ll get your 2025/26 Self Assessment filed for free. If you’ve already filed using another software, ANNA will refund your filing costs when you open an account.
• 24/7 support when things aren’t clear: If you’re unsure how something affects your tax, you can get help instantly, without waiting for an accountant.

Sign up with ANNA today to manage your Capital Gains Tax on property without the admin stress.