Sarah Bradford explains when and how it is necessary to report a gain on the disposal of a residential property and pay the associated tax.
Not all residential property is equal when it comes to the tax treatment of capital gains.
Setting the scene
Where a property is sold or otherwise disposed of (e.g., given to a family member other than a spouse or civil partner) and a gain arises, there will be no capital gains tax (CGT) to pay if the property has been the owner’s only or main residence throughout the full period of ownership (or for all but the last nine months). If this is the case, the private residence exemption will shelter the gain from CGT.
However, for properties such as investment properties and second homes which have not been occupied throughout as a main home, there may well be CGT to pay if a gain arises on the disposal of the property.
The end of the favourable tax rules for furnished holiday lettings and the increase in tenants’ rights in the Renters Reform Bill, together with the fear that the freeze in the higher residential rate of CGT at 24% may be a limited time offer, may lead many landlords to the decision that it is time to exit the market. Those looking to sell second homes may also opt to do this sooner rather than later to ensure that any gain is taxed at 24%, in case the rate is increased.
Residential property gains have their own rules when it comes to CGT, with a limited window in which to report the gain to HMRC and pay the associated tax. Taxpayers who fail to comply with the rules will face interest and penalties, with ignorance of the rules offering no defence.
Reporting the gain
When 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. HMRC has a dedicated online service for doing this, and taxpayers will need to set up a ‘Capital Gains Tax on UK Property’ account to report their gain online. Guidance on how to do this can be found on the Gov.uk website at: www.gov.uk/tax-sell-property.
To report the gain, the following information is required, and it is sensible to ensure that it is all to hand before starting the reporting process:
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address and postcode of the property;
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the date that the property was acquired;
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the date of exchange of contracts on the sale of the property;
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the completion date of the sale;
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the amount paid for the property or, where relevant (e.g., if a gift from a connected person or if the property was inherited) its market value or probate value;
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the sale proceeds (or, where relevant, the market value at the date of disposal);
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the cost of any capital improvements;
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the costs associated with buying the property, such as stamp duty land tax (or equivalent), legal fees, etc.);
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the costs of selling the property (such as estate agents’ fees and legal fees); and
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details of any available reliefs and exemptions (e.g., private residence relief for periods occupied as a main home).
Where the property in question is jointly owned, each co-owner should report their share of the gain.
Once set up, taxpayers can log into their Capital Gains Tax on UK Property account to view and, where necessary, amend previous returns.
Taxpayers who are unable to report a property gain online can do so using a paper form. However, the taxpayer will need to contact HMRC to request a copy of the form.
Reporting the gain online does not remove the need to complete the CGT pages of the self-assessment tax return. These still need to be completed to enable the taxpayer’s CGT position for the year to be finalised. Once the taxpayer has submitted their self-assessment return for the tax year, they will no longer be able to amend returns made through their Capital Gains Tax on UK property account.
If an investment property or second home is sold at a loss, the loss does not need to be reported to HMRC online within 60 days. However, it should be reported on the taxpayer’s self-assessment return to preserve the loss for set-off against future capital gains.
Working out the tax on the gain
The CGT on residential property gains must be paid within 60 days of the completion date. This will be the best estimate of the tax due at that time.
However, the amount paid at this time may not be the final figure. The taxpayer’s CGT position for the year is finalised after the end of the tax year when their self-assessment return is filed. There may be additional tax to pay after the year end (e.g., if the taxpayer expected to be a basic-rate taxpayer and was actually a higher-rate taxpayer or if they realised non-residential gains on which CGT is due by the usual date of 31 January after the end of the tax year). Alternatively, the taxpayer may be due a refund if losses were realised later in the tax year after the sale of the residential property completed, or if tax was actually due at a lower rate than used when calculating the payment on account.
The gain on the property is computed in the usual way, taking into consideration the acquisition cost, any enhancement expenditure, the sale proceeds and the costs of buying and selling the property.
Any reliefs to which the taxpayer is entitled should also be taken into account. If the property had been the taxpayer’s main residence at some point, private residence relief may be due for the periods it was occupied as such, any qualifying periods of absence and the final nine months of ownership. Likewise, if the taxpayer shared property with a lodger, lettings relief may be in point.
Taxpayers are entitled to an annual exempt amount for CGT, which for 2024/25 is set at £3,000 and is to remain at this level for 2025/26. If this has not already been used, it can be taken into consideration in calculating the tax due on the chargeable residential property gain. Capital losses brought forward, and any losses realised earlier in the tax year, can also be taken into account in working out the CGT bill. However, losses realised after the completion date cannot be taken into account, even if they are realised within the 60-day reporting and payment window before the tax is paid. Instead, these will be taken into account when finalising the taxpayer’s CGT position for the year once they have filed their self-assessment tax return.
The tax due on the gain is calculated at the CGT rates for residential property gains. This is 18% where income and gains do not exceed the basic rate band and 24% once the basic rate band has been used up. Despite speculation before the Autumn Budget on 30 October 2024 that these rates would increase, the Chancellor opted instead to raise standard CGT rates, leaving the residential rates unchanged. They are to remain at 18% and 24% for 2025/26.
The tax due on the residential property gain can be paid online through the online account using a debit or corporate credit card or by approving a payment through an online account. Payments can also be made by bank transfer or by cheque. The 14-character CGT payment reference should be quoted.
Any further tax due when the taxpayer’s CGT position for the year is finalised should be paid through the self-assessment system by 31 January after the end of the tax year. If the taxpayer is due a refund (e.g., as a result of losses realised after the completion of the residential property gain, this can be claimed once the position for the year has been finalised).
Practical tip
When selling an investment property or second home, remember to report any chargeable gain to HMRC within 60 days of the completion date and pay the CGT due on the gain in the same timeframe.
