Understanding Capital Gains Tax for landlords

You pay Capital Gains Tax when you make a profit on an asset you sell (or ‘dispose of’). For landlords, this could mean paying Capital Gains Tax on buy-to-let property that you sell for more than its original cost. The tax applies to self-employed landlords. Limited companies don’t pay Capital Gains Tax, they pay Corporation Tax instead.

For Capital Gains Tax, ‘disposing’ can mean selling, gifting, or transferring. Perhaps you sell your property on the open market or gift it to a family member.

In this guide, we cover the Capital Gains Tax essentials, including allowances, reliefs, tax rates, and how to calculate your bill.

What are the landlord CGT rates?

There are two Capital Gains Tax rates for landlords in the UK.

The rate you pay will depend on your income tax bracket. For the full explanation, head to HMRC’s Capital Gains Tax page.

Here’s a quick breakdown:

18% CGT basic rate:

Landlords who are basic rate taxpayers – individuals who earn an annual income between £12,571 and £50,270 – will need to pay 18% Capital Gains Tax on profit made from residential property they sell or dispose of.

If you dispose of business assets such as machinery or equipment, these are subject to 10% capital gains as a basic rate taxpayer.

You’re also entitled to a Capital Gains Tax allowance, which should be deducted from your profit before you calculate how much tax you need to pay (we explain allowances below).

If you’re a basic rate taxpayer, but your gain is high enough to push you into the next tax bracket, you’ll need to pay the higher rate on any amount above the basic income tax band.

This means using both Capital Gains Tax rates: paying part of the tax at 18%, and part at 28%.

28% CGT higher rate:

Landlords who pay the higher rate or additional rate of income tax – £50,271 to £125,149 and £125,140 plus – also need to pay a higher rate of Capital Gains Tax on property (28%). Other assets are taxed at 20%. From 1 April 2024, Capital Gains Tax will be reduced to 24% for higher-rate earners.

With all Capital Gains Tax rates, you can make certain deductions against your gain. Namely, your Capital Gains Tax allowance, personal allowance, and some of the costs associated with buying, selling, and improving property.

What is the Capital Gains Tax allowance for landlords?

The Capital Gains Tax allowance for the 2023/24 tax year is £6,000 for individuals and £3,000 for trustees. From April 2024, this allowance will be cut to £3,000 for individuals.

To use your Capital Gains Tax allowance, simply deduct the amount from your gain. So if you make a gain of £32,000, you can deduct £6,000 from this amount. You’ll need to pay Capital Gains Tax on £26,000, instead of £32,000.

You can also carry forward old allowable losses from previous tax years to reduce your gain. If deducting these losses reduces your gain below the tax allowance threshold, you can carry any additional losses forward to future tax years.

How is landlord Capital Gains Tax calculated?

Calculating Capital Gains Tax on rental property can be complicated. Here’s an example to get you started:

Stefani is a private landlord with two properties. She sells one of them for £75,000 more than what she bought it for – meaning she has a gain of £75,000.

While Stefani owned the property, she spent £10,000 on an extension. This can be deducted from the gain, along with her Capital Gains Tax allowance of £6,000 – leaving her with a total taxable profit of £59,000.

Before calculating Stefani’s Capital Gains Tax, we also need to consider her income. Let’s say she earns £30,000 annually – meaning she’s subject to the lower Capital Gains Tax rate of 18%.

Combined, her gain and her annual income take her over the basic rate threshold of £50,270: £59,000 gain + £30,000 annual income = £89,000 total

Stefani will pay 18% Capital Gains Tax on the first £20,270 of her gain (£30,000 income + £20,270 = £50,270). 18% of £20,270 = £3,648.60

For the remaining £38,730 of her gain, she’ll need to pay the 28% Capital Gains Tax rate. This equates to £10,844.40.

Stefani’s total landlord Capital Gains Tax is £14,493 (£3,648.60 + £10,844.40).

For more help, check out the government’s step-by-step guide on calculating Capital Gains Tax.

Landlord Capital Gains Tax exemptions and reliefs

You may be able to claim some exemptions and reliefs against your Capital Gains Tax bill.

When you deduct these reliefs from your bill, it means you pay tax on a smaller amount. Take the time to read through the reliefs and exemptions below before calculating your Capital Gains Tax on rental property.

Multiple property owners:

As we’ve already touched on, individuals in the UK have a £6,000 Capital Gains Tax allowance.

If a property has more than one owner, this allowance is multiplied by the number of owners. For two owners, that would mean £12,000 can be deducted from the shared gain.

Private Residence Relief:

If you’ve personally occupied the property you’re letting out at any point during your ownership, this could reduce your CGT liability. This is called Private Residence Relief, and there are some criteria you need to meet to be eligible (check out the gov.uk website for more information).

Note that this isn’t available to landlords letting out property they haven’t occupied.

Property improvement expenses:

You can claim expenses for property improvements that aren’t normal things you’d claim for on a landlord’s Self Assessment Tax Return. Things like:

• loft conversions
• extensions
• conservatories

These are structural changes to the property and you can count them as property improvement expenses to deduct from your gain. Repairs such as replacing a boiler or fitting new windows are considered to be maintenance costs – and these fall under allowable expenses for your Tax Return.

Non-resident landlord CGT:

If you have UK rental property but you’re not a UK resident, there are some extra rules for Capital Gains Tax.

• You need to report disposals of UK land and property, even if you’re not a resident. (Non-residents can calculate their Capital Gains Tax using the method we’ve already shown in this guide.)
• If you’re a temporary non-resident, you may need to pay Capital Gains Tax on part of the gain when you return to the UK. If you have gains or losses that occur during the time you spent outside of the UK, these will be brought forward to the current tax year on your return.

Non-residents should also read HMRC’s guidance on direct and indirect disposals. If the property you sell gets most of its value from UK land, it’s likely to be an indirect disposal and you’ll need to change how you calculate CGT. Head to the HMRC website for more information on this.

Capital Gains Tax for non-residents – whether temporary or permanent – can be complex. If in doubt, talk to an accounting professional who can help you work out whether you’re liable for CGT.

Capital Gains Tax Rollover Relief:

Rollover relief is where you reinvest the sale amount from one asset into a new asset, to defer or reduce your Capital Gains Tax liability. You’re rolling over the tax you need to pay on profit.

You can't claim rollover relief if you’re selling buy-to-let property. Furnished holiday lets and other assets may count towards rollover relief, but you should check HMRC guidance before claiming.

Inherited property and CGT:

Capital Gains Tax isn’t something you need to pay immediately on an inherited property. When you dispose of that asset and make a profit – let’s say, you sell the house your parents passed down to you, but you already have a home you own – that’s when you’ll need to pay CGT. Just a reminder: Capital Gains Tax isn’t paid when you sell your main home.

If you decide to let out an inherited property, you’ll need to pay Income Tax on the rental income from that asset. You’ll do this through a Self Assessment Tax Return. And if you want to keep the inherited property as a second home, you’ll need to nominate one of your houses as your main home (and pay Capital Gains Tax on the other if you sell it for a profit later on).

Reporting and paying Capital Gains Tax

When it comes to reporting and paying Capital Gains Tax on rental property, UK landlords need to gather a few key details for HMRC:

• How much you bought and sold the property for
• The date you took ownership of and disposed of the property
• Improvement costs during the time you owned the asset – for example, the cost of adding an extension. You can also deduct the cost of solicitor and estate agent fees
• Any tax reliefs you’re entitled to
• Calculations for the gain or loss (head back to our example of Stefani for a step-by-step calculation)
• Basic details about your property, like the address and postcode

You must report and pay Capital Gains Tax within 60 days of disposal if the completion date was on or after 27 October 2021. You can do this online.

It’s important to report on time because penalties apply for late submissions. Gains below the CGT allowance do not need to be reported.

For more guidance on reporting and paying landlords’ Capital Gains Tax, check out the HMRC website.

Keeping on top of Capital Gains Tax on property

You need accurate and detailed records to report and pay landlords’ Capital Gains Tax. With Xero’s accounting software for landlords, you’ll always have the right information at your fingertips. Expenditure reports and receipt capture features will help you track improvement allowances and ensure you pay the right amount of Capital Gains Tax on rental property.

Xero isn’t just for tax time. Our simple financial dashboard will help you track cash flow, bills, and profitability all year. So you can build a healthy property business.

For more info on your tax obligations as a landlord, take a look at our guide to Making Tax Digital for landlords or our guide to Self Assessment for landlords.