What Exactly is Capital Gains Tax (CGT)?
Simply put, Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ a valuable asset that has increased in value. Regarding property, this tax applies to the sale of buy-to-let properties, second homes, and inherited property that you have not lived in.
CGT is levied only on the sale profit, minus the original cost and certain allowable expenses. Your primary residence is typically protected from CGT under Private Residence Relief, but conditions apply if you have used it for business or let a portion of it out. Any tax due for residential properties sold in the UK must be reported and paid to HMRC within 60 days of completion. Understanding this is key to compliance in 2025/26.
2025/26 Updates: Key Changes You Must Understand
The 2025/26 tax year introduces changes affecting anyone selling property or business assets. One of the key changes is the further reduction of the Annual Exempt Amount (AEA), which dropped from £6,000 to just £3,000 from 6 April 2025.
While the rates for residential property gains remain 18% (basic rate taxpayers) and 24% (higher rate taxpayers), the main rates for other assets (like shares) jumped to 18% and 24% in October 2024.
For investors, the rate on gains qualifying for Business Asset Disposal Relief and Investors’ Relief increased from 10% to 14% from 6 April 2025 (and to 18% in 2026). Furthermore, ‘carried interest’ gains are now taxed at 32% from April 2025. These shifts make early tax planning essential.
When and How is CGT Calculated?
Capital Gains Tax applies whenever you dispose of a property that is not your primary residence. This includes selling a buy-to-let property, disposing of a second home, or selling an inherited property (taxed on the increase in value since the date of inheritance). It can even apply when gifting property or letting a substantial part of your main home.
To calculate your liability, you deduct the original cost and allowable expenses from the sale price to find your Total Gain. After subtracting your AEA (£3,000 for 2025/26), the remaining taxable gain is charged at 18% (basic rate taxpayers) or 24% (higher/additional rate taxpayers). For example, a £217,000 gain (after costs) for a higher rate taxpayer would result in a CGT bill of over £51,000.
How to Calculate Your CGT Liability
Calculating your liability involves three main steps:
First, work out your Total Gain: subtract the sale price from the original purchase price plus all allowable costs (e.g., solicitor fees, stamp duty, improvement works).
Second, deduct the AEA, which is £3,000 for the 2025/26 tax year.
Third, apply the correct rate. You must add the taxable gain to your annual income to see which tax band you fall into. Any portion of the gain within the basic rate band is taxed at 18%, while the remainder (above the basic rate threshold) is charged at 24%.
Allowable Expenses & Reliefs You Can Claim
When calculating your gain, claiming all allowable expenses to reduce your taxable profit makes good business sense. These costs fall into three main categories: Acquisition Costs (such as Stamp Duty and legal fees on purchase), Sale Costs (such as estate agent and solicitor fees on disposal), and Capital Improvements (e.g., extensions, but not routine repairs or decorating).
Furthermore, reliefs are key to mitigating liability. The primary one is Private Residence Relief, which exempts your main home. While Lettings Relief is now heavily restricted, using un-utilised capital losses from previous disposals can be offset against current gains. Claiming these costs and reliefs correctly ensures you only pay tax on the actual profit.
Crucial Deadlines & How to Report CGT
The most important rule for UK residential property sales (excluding your main home) is the 60-day reporting window. You must calculate, report, and pay any CGT due to HMRC within 60 days of the property’s completion date, a strict deadline since October 2021. This is done through a dedicated online ‘Capital Gains Tax on UK property account‘.
To comply, detailed record-keeping is essential. You will need full details of the property’s purchase price, all associated allowable costs (acquisition, improvement, and disposal), and the exchange and completion dates. Even after reporting via the 60-day service, you must still include the gain on your annual Self Assessment tax return for final confirmation. Do not miss the 60-day deadline to avoid financial penalties and interest.
Strategies for Legally Reducing Your CGT Bill
Careful tax planning is the most effective way to legally reduce your CGT bill. Firstly, utilise your full AEA of £3,000 for the 2025/26 year. Secondly, if you can, transferring partial ownership to a spouse or civil partner before a sale will allow you to split the gain and use two AEAs.
Thirdly, excellent record-keeping of all allowable costs is non-negotiable. Finally, strategic use of reliefs is vital: if you previously lived in a rental property, you can claim Private Residence Relief for that period, plus the final nine months of ownership, significantly lowering the taxable gain. Careful timing and planning could move part of a gain into a lower-rate tax year.
Why Working with Professionals Matters
Given the sharp reduction in the tax-free allowance and the strict 60-day reporting deadline, navigating Capital Gains Tax rules for the 2025/26 tax year without professional support is risky. A specialist accountant can ensure your calculations are accurate, help you claim every allowable expense, and strategically time a sale to minimise your liability.
Crucially, they prevent costly errors and missed deadlines, which carry penalties and interest from HMRC. Additionally, a proactive letting agent can assist by providing accurate historical property documents needed for the calculation. Investing in professional advice is the most effective way to ensure full compliance and avoid overpaying on your property sale.
Common Misconceptions & Pitfalls to Avoid
Even experienced sellers can fall victim to costly CGT errors. A primary pitfall is confusing repairs with capital improvements: routine maintenance costs (like decorating) are not allowable expenses, but significant structural upgrades (like an extension) are. You must also not assume your main home is always exempt; letting out a considerable portion can trigger a liability.
Forgetting the rapid reduction of the Annual Exempt Amount to just £3,000 for 2025/26 is a major mistake that catches out many smaller investors. Finally, if you are a business owner, be careful not to assume Business Asset Disposal Relief remains at 10%; it was raised to 14% from April 2025, making transitional contract rules crucial for those selling business assets.
Conclusion
For most UK property investors, Capital Gains Tax is an unavoidable cost when selling appreciated assets. However, the key takeaway from the 2025/26 updates, particularly the reduced £3,000 allowance and the strict 60-day deadline, is the necessity of proactive planning.
By clearly understanding how CGT is calculated, claiming every available relief, and keeping detailed records, you can legally minimise your liability and keep more of your hard-earned profit.
Do not leave tax planning to the last minute. At Crown Luxury Homes, we can connect you with trusted, specialist tax advisors to ensure you navigate the CGT rules with absolute clarity and confidence. Contact us today for tailored support.
