Do I Pay Capital Gains Tax When Selling a Rental Property

Selling a rental property often triggers a large Capital Gains Tax bill because property tends to rise in value over time. Many landlords are surprised by how high the tax can be, especially now that the annual allowance has dropped significantly. Understanding how the tax works gives you the chance to plan ahead, reduce your bill and avoid penalties or missed deadlines.

This article explains everything you need to know in a clear and practical way.

1. Do You Pay Capital Gains Tax When Selling a Rental Property

Yes. In almost all cases you must pay Capital Gains Tax when you sell a rental property for a profit. This is because the property is not your main residence and therefore does not qualify for Private Residence Relief.

Capital Gains Tax applies when you:

• sell a buy to let

• sell a property you previously lived in but later rented out

• sell a holiday let

• sell a second home

• transfer a rental property to someone other than your spouse

• gift a rental property to children or relatives

If the property has increased in value at any point between purchase and sale, the gain is taxable.

2. How Capital Gains Tax Works for Rental Properties

Capital Gains Tax is charged on the profit, not the full sale price.

The basic calculation is:

Sale price
minus
Purchase price
minus
Allowable costs

This gives your capital gain.

You then deduct your annual CGT allowance (currently £3,000).
The remainder is taxed at:

• 18 percent if you are a basic rate taxpayer

• 24 percent if you are a higher or additional rate taxpayer

This rate applies only to residential property.

In my opinion

The 24 percent rate for higher rate taxpayers catches many landlords by surprise because it used to be 28 percent, so some people still assume the old rate applies.

3. What Costs You Can Deduct to Reduce Your Gain

You can deduct costs that relate directly to buying, improving or selling the property.

Allowable costs include:

• the price you paid for the property

• solicitors’ fees on purchase and sale

• stamp duty

• estate agent fees

• survey fees

• certain mortgage arrangement fees

• capital improvement costs

• new extensions or structural work

• new kitchens where layout is changed

• new bathrooms

• loft conversions

• landscaping that improves value

• building an outbuilding or garage

Repairs cannot be deducted

Repairs such as repainting, replacing a broken boiler or fixing damp are classed as revenue expenses. They reduce your rental profit during the year but are not deductible for Capital Gains Tax.

In my opinion

The biggest mistake landlords make is failing to keep receipts for improvement work. Without evidence you cannot deduct it.

4. How the Annual CGT Allowance Affects You

The annual exemption for 2024 to 2025 is just £3,000.

You deduct this from your total gain.
It cannot be carried forward.

Example:

Gain = £40,000
Less allowance = £3,000
Taxable gain = £37,000

Tax = £37,000 × 24 percent = £8,880 (if you are a higher rate taxpayer)

5. When You Must Report and Pay the Tax

This is one of the most important parts.

When you sell a residential property you must:

• submit a Capital Gains Tax return within 60 days of completion

• pay the tax within the same 60 day period

This 60 day rule applies even if:

• you file Self Assessment

• you plan to pay later

• you are waiting for your accountant

• you do not know the exact tax

You can amend the return later, but the initial report and payment must still be made.

If you miss the 60 day deadline

You may face:

• penalties

• interest

• HMRC enquiries

In my opinion

This rule catches landlords more than anything else because they assume they can wait until the Self Assessment deadline. You cannot.

6. What Happens if You Once Lived in the Rental Property

If you lived in the property as your main home before renting it out, you may qualify for:

• Private Residence Relief for the time you lived there

• Final period exemption for the last 9 months of ownership

Example:

You lived in the property for 5 years
You rented it for 10 years
Total ownership 15 years
You can claim relief on 5 years out of 15 plus the final 9 months.

This can significantly reduce your gain.

7. What Happens if You Gift the Rental Property

Gifting a rental property to:

• your children

• your parents

• your relatives

• friends

• a trust

counts as a disposal for Capital Gains Tax.

You are treated as selling the property at its full market value even if no money is exchanged.

The only exception is gifting to your spouse or civil partner, which is tax free.

In my opinion

People are often shocked that gifting a property creates a tax bill.

8. Do You Pay Capital Gains Tax on Inherited Rental Property

You do not pay CGT at the moment you inherit.
You pay CGT only if you later sell it for more than its probate value.

Example:

Probate value = £200,000
You sell it for £260,000
Gain = £60,000
You may owe CGT on this gain.

Inheritance Tax and Capital Gains Tax are separate.

9. Can You Reduce Your CGT Bill by Owning Property Jointly

Yes. Joint owners each use their own tax allowances.

Example:

A married couple own a rental property jointly.
Your gain is £50,000.
Split 50/50, each has a gain of £25,000.
Each claims the £3,000 allowance.
Each pays tax on £22,000.

Joint ownership can reduce tax if structured correctly.

10. Can You Reduce Capital Gains Tax by Making Pension Contributions

Surprisingly, yes.

Pension contributions reduce your taxable income and can:

• keep you in the basic rate band so you use the 18 percent rate

• reduce how much of the gain falls into the higher rate band

Example:

You are close to the higher rate threshold.
You make a pension contribution that reduces your income.
More of your gain is taxed at 18 percent instead of 24 percent.

In my opinion

This is one of the most powerful tools landlords can use for CGT planning.

11. What Records You Must Keep

Keep:

• purchase documents

• stamp duty receipt

• solicitor statements

• estate agent invoices

• receipts for improvements

• records of selling costs

• evidence of time lived in the property (if applicable)

Good evidence reduces your tax bill because you can claim more deductible costs.

12. Real World Examples

Example 1: Higher rate landlord

Tom sells a rental property with a £70,000 gain.
After his £3,000 allowance, he pays CGT on £67,000 at 24 percent = £16,080.

Example 2: Landlord who once lived in the property

Emily lived there 4 years, rented for 6.
She claims 4/10 of the gain plus the final 9 months.
Her CGT bill falls dramatically.

Example 3: Joint ownership

A couple sells a rental with a £40,000 gain.
Split between them, each has £20,000 gain.
Each uses the £3,000 allowance.
CGT falls from £37,000 taxed to £34,000 taxed, saving money.

Example 4: Missing deadlines

James sells a rental property and forgets the 60 day rule.
He receives penalties and interest on late payment.
He later amends his return during Self Assessment.

13. In My Opinion: Planning Ahead Is Essential

In my opinion landlords should never sell a rental property without understanding the CGT consequences. Good planning can:

• reduce your gain

• increase deductible costs

• allow time to gather records

• reduce your tax rate

• use more than one tax year

• avoid missing the 60 day deadline

I have seen many landlords overpay tax simply because they sold without advice. A quick conversation with an accountant before sale often pays for itself many times over.

Conclusion

Yes, you usually pay Capital Gains Tax when selling a rental property. The tax is based on the gain after deducting allowable costs and applying your annual allowance. Gains are taxed at 18 percent or 24 percent depending on your income level. You must report and pay the tax within 60 days of completion and keep detailed records to support your calculation.

In my opinion the key to reducing CGT is planning early, keeping accurate documentation and understanding the reliefs available if you once lived in the property or hold it jointly.