What is Capital Gains Tax (CGT)? Understanding the Basics

Capital Gains Tax (CGT) is a tax on the profit made when selling something that has increased in value. For example, if you bought a second property for £200,000 and later sold it for £300,000, your capital gain would be £100,000 (before any deductions). 

For homeowners and investors, understanding CGT is essential for financial planning and tax compliance. It applies to second homes, investment properties, shares outside tax-free accounts, business assets, and valuable items worth over £6,000 (except cars).

What percentage is Capital Gains Tax?

How much CGT you pay depends on what you're selling and your income tax band. For the 2024/25 tax year, if you're selling property and you're a basic rate taxpayer, you'll pay 18%, whereas higher or additional rate taxpayers will pay 24%. For other items, basic rate taxpayers pay 10%, while higher and additional rate taxpayers pay 20%. Everyone gets a tax-free allowance of £3,000 per year. This means you only pay tax on gains above this amount.

Capital Gains Tax on properties

When it comes to property, there are some special rules to know:

Your main home. You usually don't pay CGT when selling your main home thanks to something called Private Residence Relief. This is a tax break that means you don't pay tax on profits from selling the home you live in. However, this might not fully apply if you've used part of your home for business, rented out rooms, have very large grounds, or haven't lived there continuously.

Investment properties. If you sell a buy-to-let property or holiday home, you will need to pay CGT on any profit. The higher property rates mentioned earlier will apply.

Tax relief for landlords. Previously, landlords who once lived in their rental property could claim substantial tax relief when selling. Now, this benefit (called Letting Relief) only applies if you were actually sharing the home with your tenants at the same time.

Reducing your tax bill

One way to reduce your CGT is to deduct certain costs from your gain, including what you paid to buy and sell the property and improvements you've made (but not regular maintenance). Married couples can transfer assets between each other to use both tax-free allowances. You can also sell assets across different tax years or use losses from other sales to offset your gains.

Reporting and payment

If you sell a residential property, you must report and pay any CGT within 60 days of completing the sale. For other items, you typically report CGT through your annual Self-assessment tax return.

Understanding CGT before selling property can help you save money on your tax bill. If you own multiple properties or expect large gains, it's worth talking to a professional who can help you take advantage of all available tax reliefs.