Sarah Bradford outlines how to calculate the chargeable gain arising on the disposal of a residential property.
----------------------
This is a sample article from our property tax saving newsletter - Try Property Tax Insider today.
---------------------
The loss of tax breaks and increased rights for tenants have resulted in many landlords taking the decision to exit the market and to sell the buy-to-let or holiday home.
Gains on residential property have their own rules. Where a chargeable gain arises on the disposal of a residential property, that gain must be reported to HMRC within 60 days of the completion date. The gain must be reported through HMRC’s online capital gains tax on UK property service and the taxpayer must create an account for this purpose. The tax that is due on the gain must be paid within the same timeframe.
Calculating the gain
The tax on the residential property gain must be calculated and paid separately from other gains realised in the same tax year. The tax that is paid on the gain is the best estimate of the tax that will eventually be due at the time that the gain is realised. This may not be the final figure – for example, the eventual bill may be lower if the taxpayer realises a loss later in the same tax year.
Gains on residential property (from 30 October 2024) are taxed at the same rate as other gains (with the exception of carried interest). This makes the computation more straightforward.
Normal capital gains tax rules apply to work out the gain which is the sale proceeds (or, where applicable, the market value at the date of disposal), less:
-
the original cost of the property;
-
any enhancement expenditure;
-
the costs of sale; and
-
the costs of acquisitions.
It is also necessary to take account of any reliefs and exemptions which may be available, such as principal private residence relief if at any time the property has been lived in as a main home.
To the extent that it has not already been used, the gain can be reduced by the annual exempt amount.
Sale proceeds or market value
The starting point for the capital gains tax computation will usually be the sale proceeds. This is the amount that the purchaser paid for the property before deducting any fees, such as estate agents' and solicitors' fees.
Where the disposal is not an arm’s length disposal to a third party, the market value at the date of disposal is used instead of the actual sale proceeds. This may apply if the property is sold cheaply to a family member or given to a son or a daughter.
Enhancement expenditure
In working out the gain, amounts spent on improving the property can be deducted. Here, it is important to distinguish between capital improvements, such as an extension or a conservatory and revenue repairs, such as mending a roof or redecorating. Where the property has been let, relief for repair and maintenance expenditure is deductible in calculating the profits of the property rental business.
To qualify as enhancement expenditure, the expenditure must have been incurred wholly and exclusively on the property for the purposes of enhancing it and it must still be reflected in the state or nature of the property at the date of disposal. The need for the enhancement to be present in the property at the time of disposal is illustrated by HMRC in their Capital Gains Tax Manual at CG15180 by way of an example of a taxpayer who builds a tennis court in his grounds and later replaces the tennis court with a swimming pool. The cost of the tennis court cannot be deducted in calculating the chargeable gain on the sale of the property, as it is not present at the time of disposal. At a more suburban level, if a taxpayer lives in a property for a number of years and upgrades the kitchen shortly after purchasing the property and some years later extends the property and replaces the kitchen, the cost of the first kitchen cannot be deducted when calculating the gain as it is not present in the property at the time of disposal.
However, demolition costs can be taken into account in calculating the gain; for example, if a dilapidated outbuilding is demolished to enhance the garden, the cost of demolishing the outbuilding can be deducted.
The cost of an expenditure incurred in establishing or preserving or defending title to the land or a right over it can also be deducted. Where the property is a leasehold property, costs incurred in extending the lease constitute capital expenditure which may be deducted.
Original cost
The original cost of the property will normally be the amount paid for it, before taking account of stamp duty and legal fees.
However, if the property was acquired by way of gift or inherited, the ‘cost’ will be the market value at the date of acquisition. In the event that the property was acquired before 31 March 1982, its 31 March 1982 market value can be deducted instead, where this is greater than its original cost.
Costs of sale
Costs will be incurred in selling a property, such as estate agents’ fees and solicitors' fees.
These can be deducted when computing the chargeable gain.
Cost of purchase
Costs will also be incurred when purchasing a property.
These will include stamp duty land tax (SDLT; or equivalent in Scotland and Wales) and legal fees. Like the costs of sale, these can be deducted in computing the chargeable gain.
Principal private residence relief
Principal private residence relief may be available if the property has been lived in as a main home at some point during the period of ownership. Where this is the case, the gain that is attributable to the period for which it was occupied as an only or main residence and the final nine months qualify for the relief.
Certain qualifying periods of absence may also count. For example, if a person occupies a property as a main residence, moves out and then moves back in again before selling it, a period of up to three years can also qualify for relief.
Business asset disposal relief
Under the favourable tax regime that applied to furnished holiday lets (FHLs) prior to 6 April 2025, business asset disposal relief (BADR) was available if the FHL business ceased and the properties were sold.
Where an FHL business ceased before 6 April 2025, if the properties are sold within three years of the date of cessation, BADR remains available as long as the associated qualifying conditions are met. This reduces the tax rate to 14% where the disposal takes place before 6 April 2026 and to 18% where it takes place on or after that date.
Annual exempt amount
The annual exempt amount is £3,000 (for 2025/26).
It can be deducted in calculating the residential property gain if it has not already been applied to earlier disposals in the tax year.
Annual recalculation
The liability for the tax year as a whole is determined when the self-assessment return is filed.
The return will take account of all disposals in the tax year, not just those in relation to residential property. Any further tax that is due must be paid by 31 January after the end of the tax year. If the eventual liability is less than that paid on the residential property gain, the excess will be refunded.
Case study: Sale of long-term residential letting
Jake sells a property which had been let as a long-term residential let since he purchased it in 2017. The property cost £300,000, on which Jake paid SDLT of £5,000. He also paid legal fees of £1,200.
Jake extended the property and added a new kitchen, which cost £60,000.
He sold the property for £500,000 on 31 May 2025. He paid estate agents’ fees of £9,000 and legal fees of £1500.
Jake is a higher rate taxpayer.
The capital gains tax on the sale of the property is calculated as follows:
|
Sale proceeds |
|
£550,000 |
|
Original cost |
£300,000 |
|
|
Enhancement expenditure |
£60,000 |
|
|
Costs of acquisition (£5,000 + £1,200) |
£6,200 |
|
|
Costs of sale (£9,000 + £1,500) |
£10,500 |
|
|
|
|
(£376,700) |
|
Gain |
|
£173,300 |
|
Less: Annual exempt amount |
|
(£3,000) |
|
Chargeable gain |
|
£170,300 |
|
Capital gains tax at 24% |
|
£40,872 |
The gain must be reported and the tax paid by 30 July 2025.
Assuming Jake realises a loss on some shares of £10,000 in November 2025 and makes no further disposals in the 2025/26 tax year, his chargeable gains for the year are £160,300 (£173,300 - £10,000 - £3,000) on which capital gains tax of £38,472 is due. As Jake has already paid £40,872 on his residential property gain, he is entitled to a refund of £2,400.
Practical tip
When calculating the gain on the disposal of a residential property, ensure all allowable costs are taken into account.
