In the UK, when you sell a rental property, any profit you make is subject to Capital Gains Tax (CGT). The amount of CGT you pay depends on various factors, including the length of time you have owned the property, the price you paid for it, and the costs incurred in buying, maintaining, and selling the property. Understanding the ins and outs of CGT on rental properties can help you plan for your tax liability when selling such an asset.
This article outlines the key considerations for property owners regarding CGT on rental property in the UK, providing an overview of how the tax is calculated, potential exemptions, and strategies to minimise the tax burden.
When Do You Pay Capital Gains Tax on Rental Property?
Capital Gains Tax (CGT) is the tax paid on the profit (gain) made when you sell, gift, or otherwise dispose of an asset that has increased in value since you acquired it. For rental property owners, this means CGT is due on the difference between the selling price and the property’s "base cost," which includes the purchase price, and any allowable expenses or improvements made to the property.
When a gain is made in course of disposing of some assets, the gain usually is subject to CGT unless specific exemptions or relief applies. While rental income is taxed under Income Tax, CGT is separate and only applies when you dispose of the asset.
How to Calculate Capital Gains Tax on Rental Property?
CGT is calculated based on the net gain, which is the amount left after deducting the costs of acquisition, selling costs, and eligible improvements to the property from the sale proceeds.
What Costs Can You Deduct From Your Capital Gain?
When calculating your capital gain, you can deduct three categories of costs.
Acquisition costs are expenses you incurred when purchasing the property. These include solicitor fees, surveyor fees, and stamp duty land tax paid at the time of purchase. If you used a mortgage broker or property finder service, their fees also qualify as acquisition costs.
Disposal costs are expenses directly related to selling the property. Estate agent fees, solicitor fees for the sale, and advertising costs all fall into this category. If you paid for an Energy Performance Certificate specifically for the sale, this also qualifies.
Improvement costs are costs that enhanced the property's value, not routine maintenance. An extension, loft conversion, new bathroom installation, or replacing a kitchen all qualify. Routine repairs and maintenance like redecorating, fixing a boiler, or replacing broken tiles do not qualify because these maintain the property's condition rather than improving it. For example, if you installed a new kitchen because the old one was worn out, that's an improvement. If you repainted the existing kitchen, that's maintenance.
You must keep all receipts and invoices for these costs. HMRC may request evidence during compliance checks, and reconstructing costs years after a sale is often impossible. For detailed guidance on what qualifies as an allowable deduction, see HMRC's Capital Gains Manual CG15250.
The formula for calculating Capital Gains on rental property is:
Capital Gain = Sale Price – Purchase Price – Allowable Costs
Once you know your capital gain, you deduct the annual allowance (£3,000) and apply the applicable CGT rate to calculate your tax liability.
CGT Liability Calculation
Adam sold a rental property in September 2025 for £250,000. The property was originally bought in March 2018 for £185,000. He is a basic rate taxpayer with an annual income of £38,000. The costs incurred were Stamp Duty (purchase) of £4,500, Solicitor fees (sale) of £1,100, Estate agent fees (sale) of £4,500, and a Loft conversion done in 2021 for £15,000, giving total allowable costs of £25,100.
Step 1: Calculate the capital gain
Capital Gain = Sale Price – Purchase Price – Allowable Costs
£250,000 – £185,000 – £25,100 = £39,900 total gain
Step 2: Deduct the annual CGT allowance
£39,900 – £3,000 = £36,900 taxable gain
Step 3: Calculate the CGT liability
CGT Liability = Taxable Gain × Applicable Rate(s)
Adam's income is £38,000. The basic rate threshold is £50,270, leaving him £12,270 of headroom in the basic rate band. The first £12,270 of the gain is taxed at 18%, which equals £2,209. The remaining £24,630 is taxed at 24%, which equals £5,911.
Total CGT liability: £8,120
Adam's net profit after tax is £31,780 (£39,900 capital gain less £8,120 CGT payable).
What Are the CGT Rates for Rental Property in the UK?
The rate at which CGT is applied depends on the individual's income level and whether the gain is classified as a higher or basic rate taxpayer.
- Basic Rate Taxpayers: If your total taxable income (including your capital gain) falls within the basic rate tax band (up to £50,270 for the 2024/25 tax year), the CGT rate is 18% on both residential and commercial rental property.
- Higher Rate Taxpayers: If your total taxable income exceeds the basic rate threshold, you will have to pay 24% CGT on the gain from the sale of both residential rental property and commercial rental property.
How Private Residence Relief (PRR) Reduces Your CGT Bill
If the rental property which is being disposed of was your primary residence for part of the time, you may be eligible for Private Residence Relief (PRR), which can exempt part or all of the gain from CGT.
However, the exemption does not extend to rental properties that have been rented out during the period of ownership unless part of the property was used as the owner’s main residence.
If you sell a property that has both been your primary residence and a rental property, a portion of the gain may be exempt from CGT, depending on how the property was used during ownership.
For more information regarding PRR relief, refer to, "HS283 Private Residence Relief (2024) - GOV.UK".
Does Letting Relief Still Apply After April 2020?
Letting relief was previously available to homeowners who rented out part or all of their property, reducing their CGT liability on the sale of the property. However, from April 2020, this relief was significantly restricted.
Under the current rules, letting relief is only available if you shared occupancy with your tenant meaning you lived in the property at the same time as it was being let. Simply living in the property at an earlier time and then letting it out after you moved out does not qualify.
The maximum relief is £40,000 per person (£80,000 for married couples or civil partners). If you let out your entire former main residence after moving out, letting relief does not apply.
If the property was not used as a primary residence, letting relief will not apply.
For more information regarding letting relief, refer to, "CG64710 - Private residence relief: letting relief for letting of residential accommodation - HMRC internal manual - GOV.UK".
How to Reduce CGT liability When Selling Rental Property?
You could use several strategies to reduce your capital gains tax arising on rental properties ensuring that landlords can keep more of the proceeds from the sale. Some of the strategies are discussed below-
Offset Gains with Losses
If you have other capital losses from the sale of other assets, you may be able to use them to offset the capital gain from your rental property sale.
Gift the Property to Family Members
If the property is gifted to a family member, it may not be subject to CGT immediately. However, this could trigger Inheritance Tax (IHT) considerations and other tax liabilities.
Spouse or Civil Partner Transfers
Transfers between spouses or civil partners are not subject to CGT, so it may be beneficial to transfer the rental property to a spouse with a lower income, who may later pay CGT at a lower rate.
The 60-Day Reporting Rule: When and How to Pay CGT
If you sell a UK residential rental property with a CGT liability, you must report the disposal and pay any tax due within 60 days of completion. Use HMRC's UK Property Reporting Service to submit your return and payment. You must also include the disposal in your Self Assessment tax return for that tax year.
Penalties for Late Reporting
Missing the 60-day deadline triggers penalties:
- £100 fixed penalty if the return is filed more than 60 days late
- £10 per day (up to 90 days) if the return remains outstanding beyond 3–6 months
- 5% of tax outstanding after 6 months, and another 5% after 12 months if tax remains unpaid
- In serious cases, HMRC can impose penalties of up to 100% of the tax due
Interest also accrues on unpaid tax from the original 60-day deadline.
Conclusion
Capital Gains Tax on rental property is a key consideration for landlords and investors in the UK. While rental income is subject to Income Tax, CGT applies only when you sell or dispose of the property. Unlike other countries, the UK does not allow depreciation on rental properties for tax purposes. Instead, landlords may be able to claim capital allowances on specific assets used in the residential rental property, such as furniture or certain fixtures.
These allowances can reduce taxable rental income, but they do not directly affect the CGT calculation on the property itself. Understanding how CGT is calculated, what exemptions and reliefs apply, and the strategies available to reduce tax liability can help property owners make informed decisions about buying, selling, and managing rental properties.
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FAQs
General queries by our clients related to Capital Gains Tax on Rental Income are answered here.
In the UK, selling a standard rental property triggers CGT on the gain, even if you immediately reinvest the proceeds into another property. There is no general rollover or like-kind-exchange relief for such buy-to-let or investment properties. The main exception is where the property is a qualifying business asset (for example, a furnished holiday letting), in which case Business Asset Rollover Relief may allow deferral of part of the gain if you reinvest in another qualifying asset within the statutory time frame.
You must live in the property as your only or main residence for the entire period of ownership to avoid CGT completely. If you owned the property for 10 years, you must have lived there for all 10 years. If you moved out at any point, the period you were absent becomes taxable, subject to the final 9 months exemption and certain qualifying absences for employment or disability reasons.
Yes. Gifting property to your children is treated as a disposal for CGT purposes, and you are deemed to have sold the property at its current market value. This means you may face a CGT liability based on the difference between what you originally paid for the property and its market value at the time of the gift. Transfers to spouses or civil partners are exempt from CGT, but transfers to children, other family members, or friends are not. You should also consider potential Inheritance Tax implications if you gift property and do not survive for seven years after the gift.
If you sell a property owned by a limited company, the company pays Corporation Tax on the gain, not CGT. Corporation Tax rates range from 19% to 25% depending on the company's profits. There is no annual exempt allowance for companies. If you extract the proceeds from the company as dividends or salary, you may face additional personal tax charges.
When you inherit a property, your base cost for CGT purposes is the market value at the date of death, not the original purchase price. If the property increases in value between the date you inherited it and the date you sell it, you pay CGT on that increase. If you sell immediately after inheriting, there may be little or no gain. The final 9 months PRR exemption does not apply unless you lived in the property as your main residence after inheriting it.
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