How Much Is Capital Gains Tax On Investment Property?

Capital Gains Tax (CGT) is an essential part of your investment journey. Whether you are buying, selling, or holding property, CGT need to be calculated to avoid missed profits, unexpected penalties, and more. At Centrick Invest, we want to help you get it right so you can protect your return and make smart, confident decisions.

What Is Capital Gains Tax?

Capital gains tax – often abbreviated to CGT – refers to the tax on the profit you make when you sell or dispose of a property that has increased in value.

It’s not the amount of money you receive that is taxed, but rather the profits gained on your initial investment. So, if you bought a property for £250,000 and sold it for £350,000, you would pay gains tax on the £100,000.

Capital gains tax typically applies when you make a profit selling an investment property, such as a buy-to-let investment or second home. Typically, your main home is exempt from capital gains tax. If you’re wondering how much capital gains tax is charged on investment property, it depends on your income tax rate and the size of your gain.

Missed a CGT Deadline? Here’s What it Could Cost

We believe in taking a proactive approach to tax planning because when it comes to Capital Gains Tax (CGT), getting it wrong can be costly and failing to pay the correct CGT or submitting your return late doesn’t just mean administrative problems; it can lead to serious financial penalties from the HMRC.

Here are some of the charges you could be looking at:

£100 fixed penalty – If your CGT return is filed late, even by a single day.
£10 daily penalties – After 3 months, HMRC charges £10 per day, up to £900.
6 months late – Add another £300 or 5% of the unpaid CGT, whichever is greater.
12 months late – That’s a further £300 or 5%, and in more serious cases, penalties can rise to 100% of the tax owed.
Late payment interest – Interest accrues daily on unpaid CGT from the due date.
Additional late payment penalties – These apply to residential 60-day returns and self-assessment returns:
- 5% after 30 days
- 5% after 6 months
- 5% after 12 months

Which means that, if you owed £10,000 in CGT on a property sale and didn’t file or pay within the deadlines, you could face over £2,000 in penalties and interest within the year.

Key Terms and Definitions:

There are a few technical terms and jargon to get used to that will make the process of working out your capital gains tax a lot easier going forward.

The cost base can include the purchase price, Stamp Duty Land Tax (government tax paid when purchasing a new property), legal fees (costs paid to solicitors, etc), capital improvement costs (work that enhances the property), and estate agent fees.
The disposal value of the property is the sale price or market value.
Allowable expenses are the costs that can be deducted from the gain/ profit
The taxable gain is the profit on which capital gains tax is charged.
The annual exempt amount (AEA) is the amount you gain before capital gains tax is applied.
Basic rate/Higher rate refers to the tax band your income falls into. Basic rate taxpayers pay 18% CGT on residential property gains, while higher rate taxpayers pay 24%.

How to Calculate Capital Gains Tax (Step-by-Step):

If you are looking to sell your investment property, having a clear understanding of how to calculate CGT on investment property is vital whenmaking an informed decision and calculating your expenses accurately. Unsure how to calculate capital gains tax? Follow these six simple steps!

Step 1: Determine the Disposal Value

This is the sale price you achieve for the property: essentially, what a buyer has paid.

Step 2: Calculate the Cost Base

Add together all costs involved in purchasing and improving the property in question. This includes the original purchase price, your legal and professional fees (e.g. solicitors, stamp duty, survey costs) and any improvements like extensions or major refurbishments.

Step 3: Calculate the Net Gain (or Loss)

Now, subtract your Cost Base from your Disposal Value in order to obtain your Net Gain.

Disposal Value – Cost Base = Net Gain

This figure represents your gross profit on the property.

Step 4: Deduct Allowable Reliefs and Exemptions

You can, if applicable, reduce your net gain with any qualifying reliefs:

Annual Exempt Amount: For the 2025/26 tax year, individuals have a CGT-free allowance of £3,000 (subject to change).

Step 5: Calculate the Taxable Gain

Net Gain – Allowable Reliefs = Taxable Gain

This is the amount that will be subject to Capital Gains Tax.

Step 6: Apply the Correct CGT Rate

Capital Gains Tax rates on residential investment properties depend on your income tax band:

Basic Rate taxpayers – 18% on your gains from residential property, 32% on your gains from ‘carried interest’ if you manage an investment fund, and 18% on your gains from other chargeable assets
Higher and Additional Rate taxpayers – 24% on your gains from residential property, 32% on your gains from ‘carried interest’ if you manage an investment fund, and 24% on your gains from other chargeable assets
Trust– 24% on residential property and other chargeable assets

Your income for the year will determine which rate applies. If your total income and gains fall within the basic rate band, a portion of your gain may be taxed at 18%, with the remainder at 28%

Example Calculation:

When it comes to selling an investment property, knowing your potential tax liability can help you plan and make the most out of your returns. Here’s a simple example…

Let’s say you bought an investment property for £200,000 and invested in capital improvements like a loft conversion of £25,000. Then you paid professional costs like legal fees or estate agent fees of £10,000, which would make the total cost of the property £235,000. If you were to sell the property for £300,000, and you are a high-rate taxpayer with an annual capital gains tax allowance is £3,000.

Step-by-Step Calculation

Disposal Value/ Sale Price

£300,000

Cost Base

Purchase price: £200,000, Capital improvements: £25,000, Professional fees: £10,000

Total Cost Base = £235,000

Net Gain

£300,000 (sale price) – £235,000 (cost base) = £65,000

Deduct Allowances

Annual exempt amount (tax-free): £3,000

Taxable gain = £62,000

Apply the CGT Rate

As a higher-rate taxpayer, residential property gains are taxed at 28%.

Capital Gains Tax due = £62,000 × 28% = £17,360

Which would make your final tax liability: £17,360

Important Considerations & Tips:

There are plenty of things that you can do to ensure a smoother process and help you understand capital gains tax more easily.

Keeping records of all of your costs is important, and you will need to collect records to calculate your gains and fill in your tax return. You must keep these records for at least a year after the self-assessment deadline. Seeking some professional advice is always helpful, as qualified tax advisors or accountants can help you navigate the process and explain anything that may be confusing or concerning. This is especially true considering the frequent changes in legislation, as well as the severe penalties you may encounter if you fail to pay the correct amount of stamp duty.

Capital Gains Tax Made Easy with Centrick Invest

Knowing exactly how capital gains tax is calculated when selling investment property is paramount for strategic decision-making regarding your sale. An incorrect calculation isn’t merely an error; it can be detrimental, leading to severe penalties, unexpected tax burdens, and a diminished return on your investment.

Having property experts such as Centrick Invest on your side when it comes to offloading or expanding your property portfolio can help you avoid these mishaps when it comes to CGT. Whether you’re considering your next move, planning to offload parts of your portfolio, or are just curious about maximising your returns, we’re here to help. Centrick Invest’s team of property investment experts are here to help simplify some of the complexities of capital gains tax, provide insider insight into the broader investment landscape, and make sure your portfolio is as robust as possible.

Get in touch below to talk to our team!