Capital Gains Tax on Property: A Complete UK Guide

What Is Capital Gains Tax on Property?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell (or "dispose of") an asset that has increased in value. When it comes to UK residential property, CGT applies to the sale of second homes, buy-to-let properties, holiday homes, inherited properties, and any other residential property that is not your main home. The gain is calculated as the difference between the price you paid for the property (or its market value when you acquired it) and the price you sell it for, after deducting allowable costs.

CGT on property is one of the most common and significant tax liabilities that individuals face, particularly in London and the South East where property values have risen substantially over the past two decades. Understanding how CGT works, what reliefs are available, and how to structure a sale tax-efficiently can save you tens of thousands of pounds. This guide covers everything you need to know for the 2025/26 tax year. For CGT on shares, business assets and other investments, see our general capital gains tax guide.

CGT Rates on Residential Property in 2025/26

The CGT rates for residential property in the 2025/26 tax year are higher than the rates for other assets (such as shares or business assets). Following changes introduced in the Autumn Budget 2024, the rates are:

• 18% for basic-rate taxpayers (taxable income up to £37,700)
• 24% for higher-rate and additional-rate taxpayers (taxable income above £37,700)

These rates apply to gains on residential property only. For other assets, the rates are 10% (basic rate) and 20% (higher rate). The rate you pay depends on your total taxable income in the year of disposal. Your capital gain is effectively added on top of your income, so even if you are normally a basic-rate taxpayer, a large gain could push part of it into the higher-rate band.

For example, if your taxable income is £30,000 and you make a gain of £40,000, the first £7,700 of the gain falls within your basic-rate band (£37,700 - £30,000) and is taxed at 18%. The remaining £32,300 is taxed at 24%. This split-rate calculation means it is important to consider timing and income levels when planning a property sale.

The Annual Exempt Amount for CGT in 2025/26 is £3,000 per individual. This is the amount of gain you can make each tax year before CGT applies. It has been reduced dramatically from £12,300 just a few years ago, which means far more property disposals now trigger a tax liability. Each individual has their own allowance, so a married couple selling a jointly-owned property can benefit from £6,000 of combined exemption.

Principal Private Residence Relief (PPR)

The most important CGT relief for property owners is Principal Private Residence Relief (PPR), which exempts your main home from CGT entirely. If you have lived in a property as your only or main residence throughout the entire period of ownership, the gain is fully exempt from CGT. This is why most people never pay CGT when they sell their home.

However, PPR is not always straightforward. Issues arise when:

• You have lived in the property for only part of the ownership period — for example, if you lived in it for five years and then rented it out for three years before selling. In this case, PPR applies only to the period of occupation plus the final nine months of ownership (which are always covered by PPR regardless of whether you lived there).
• You own more than one property — you can only have one main residence at a time for PPR purposes. If you own two properties and live in both, you must elect which one is your main residence within two years of acquiring the second property. Getting this election wrong can be very costly.
• You have let out part of your home — if you rent out a room or a floor of your home, part of the gain may not be covered by PPR, although Letting Relief (see below) may apply.
• You have used part of the property exclusively for business — if a room is used solely for business and has never been used for personal living, that portion of the gain is not covered by PPR.

Given the complexity of PPR, particularly for London residents who may own multiple properties or have complex living arrangements, professional advice from a tax planning specialist is strongly recommended before selling.

Lettings Relief

Lettings Relief is available where a property that qualifies for PPR has also been let out as residential accommodation. Following changes from April 2020, Lettings Relief is now only available where the owner is in shared occupation with the tenant — meaning you and the tenant both live in the property at the same time. This significantly reduced the scope of the relief compared to the previous rules, where it was available whenever a PPR-qualifying property had been let out at any time.

Where it does apply, Lettings Relief exempts the lowest of the following amounts from CGT:

• The amount of PPR relief already given
• £40,000
• The gain attributable to the letting period

In practice, Lettings Relief now benefits a much smaller group of property owners — primarily those who let out a room in their own home while continuing to live there. If you rented out an entire property after moving out, Lettings Relief will not apply under the current rules. However, you would still benefit from PPR for the period you lived there plus the final nine months of ownership.

The 60-Day Reporting and Payment Rule

Since April 2020, UK residents who dispose of UK residential property at a gain must report the disposal to HMRC and make a payment on account of the CGT due within 60 days of the completion date. This is done through the HMRC Capital Gains Tax on UK Property service (the "CGT on UK property account"), which is separate from your Self Assessment tax return.

The 60-day rule applies when:

• You sell a UK residential property that is not your main home
• You make a gain on the sale (after reliefs and the annual exempt amount)

It does not apply to your main home (which is fully covered by PPR) or to commercial property. The 60-day deadline is strict, and late-reporting penalties apply even if you eventually report the gain on your Self Assessment return. The penalties mirror the Self Assessment late-filing regime: £100 for up to 6 months late, escalating penalties thereafter.

The payment on account is an estimate of the CGT due, calculated using the information available at the time of the disposal. You can adjust this figure in your Self Assessment return at the end of the tax year, and any overpayment will be refunded. However, underpayment may attract interest from the original due date.

This 60-day requirement catches many property sellers by surprise. Completions can be hectic, and CGT is often not front of mind during the conveyancing process. We strongly recommend engaging a tax adviser before completion so that the reporting and payment can be handled promptly. Our tax advice team routinely handles 60-day CGT reports for clients selling investment properties across London.

How to Calculate Your Capital Gain

The basic calculation for a property capital gain is:

Sale price − Purchase price − Allowable costs − Annual Exempt Amount = Taxable gain

Allowable costs include:

• Purchase costs: Stamp Duty Land Tax paid on acquisition, solicitor's fees, surveyor's fees, and estate agent's fees (on purchase)
• Improvement costs: Capital expenditure that has enhanced the value of the property, such as extensions, loft conversions, new kitchens or bathrooms, and structural alterations. Routine maintenance and repairs do not qualify — they must be genuine improvements that add value.
• Sale costs: Estate agent's fees, solicitor's fees, Energy Performance Certificate costs, and any other costs directly related to the sale

It is essential to keep records of all these costs. HMRC may ask for evidence, and without receipts or invoices, you may not be able to deduct them from your gain. We advise all property owners to maintain a dedicated file of all property-related expenditure from the date of purchase.

For properties acquired before 31 March 1982, the market value at that date is used instead of the original purchase price. For properties acquired by inheritance, the probate value at the date of death is used as the base cost. For gifted properties, the market value at the date of the gift is used. Use our Stamp Duty calculator to estimate one component of your allowable purchase costs.

Strategies to Reduce Your CGT Bill

There are several legitimate strategies to reduce or defer CGT on a property disposal. These should be considered well in advance of a sale, not as an afterthought:

1. Use your Annual Exempt Amount. Each individual has a £3,000 annual exemption. If you jointly own a property with your spouse or civil partner, you can each use your own exemption, sheltering £6,000 of gain from CGT. Timing a sale to straddle two tax years is no longer practical given the low exemption, but using both spouses' allowances remains important.

2. Transfer to a spouse before selling. Transfers between spouses and civil partners are exempt from CGT. If one spouse is a basic-rate taxpayer and the other is a higher-rate taxpayer, transferring the property (or a share of it) to the lower-earning spouse before selling can mean the gain is taxed at 18% rather than 24%. This is a well-established planning technique, but it must be a genuine transfer — not a paper exercise conducted solely to avoid tax. The recipient spouse must actually own the property at the time of sale.

3. Deduct all allowable costs. Many sellers forget to claim the full range of allowable costs. Stamp Duty on the original purchase, solicitor's fees, improvement costs, and selling costs can all be deducted. A loft conversion that cost £30,000 ten years ago reduces your taxable gain by £30,000. Gathering all invoices and receipts before calculating your gain is time well spent.

4. Offset capital losses. If you have made capital losses on other disposals (property, shares, or other assets) in the same tax year or in previous years, these can be set against your property gain to reduce the taxable amount. Unused losses can be carried forward indefinitely, but must be registered with HMRC within four years of the tax year in which they arose.

5. Consider the timing of the sale. If you are close to a tax-year boundary, consider whether completing the sale in one tax year versus the next could affect the rate of CGT you pay. Changes in your income level from year to year can alter whether your gain falls into the basic-rate or higher-rate band.

6. Main residence election. If you own two properties and live in both at different times, a carefully timed main residence election can maximise the PPR available across your portfolio. This is complex and requires specialist advice, but the savings can be very significant.

CGT on Inherited Property

When you inherit a property, the base cost for CGT purposes is the probate value — the market value of the property at the date of death, as agreed with HMRC for Inheritance Tax purposes. This means you only pay CGT on the increase in value from the date of death to the date you sell, not from the date the deceased originally purchased the property.

For example, if your parent bought a property for £100,000 in 1995, it was valued at £400,000 at the date of their death in 2023, and you sell it for £450,000 in 2026, your gain for CGT purposes is £50,000 (£450,000 − £400,000), not £350,000. This "uplift" to probate value is one of the most valuable tax reliefs available and is often overlooked when planning estates.

If you inherit a property and use it as your main home, PPR will apply for the period you live there. If you inherit a property and sell it relatively quickly (before its value changes much from the probate value), the gain may be small or nil, and the Annual Exempt Amount may cover it entirely. However, if you hold an inherited property as an investment for many years before selling, a significant gain can build up.

It is worth noting that if a property is left to you and the deceased's estate is subject to Inheritance Tax (IHT), this is a separate tax and does not reduce your CGT liability. You could end up paying both IHT (through the estate) and CGT (on a subsequent sale). However, there is no "double taxation" in the technical sense — IHT is charged on the value at death, and CGT is charged on the growth after death.

Get Professional Advice Before You Sell

Capital Gains Tax on property is one of the areas where professional tax advice delivers the greatest return on investment. The interaction between PPR, lettings relief, spousal transfers, the 60-day reporting requirement, and the various rates and reliefs makes this a complex area where mistakes are costly and planning opportunities are easily missed.

At London Accountants, our tax planning specialists and tax advisers work with property owners across London to minimise their CGT exposure. We can help you with:

• Calculating your gain accurately, including all allowable costs and reliefs
• Advising on the optimal timing and structure for a property sale
• Preparing and filing your 60-day CGT report to HMRC
• Spousal transfer planning and main residence elections
• Handling CGT on inherited properties and liaising with probate valuers
• Incorporating property gains into your wider Self Assessment return

Whether you are selling a single buy-to-let flat or a portfolio of investment properties, we ensure you pay the correct amount of CGT — and not a penny more. For background reading, see our capital gains tax overview, or contact us for a confidential consultation about your specific property sale. With property values in London continuing to command a premium, getting your CGT planning right has never been more important.