How to Minimise Capital Gains Tax on Rental Property in Central London 

If you are considering selling your buy-to-let property in Kensington, Camden or Hampstead, you need to understand capital gains tax (CGT) and how much your final bill will likely be. 

As a buy-to-let landlord, you’ll be liable for capital gains tax (CGT) when you come to sell if the rental property has increased in value during your period of ownership. If you’re thinking of selling up, you need to understand CGT and how much your final bill is likely to be. 

Another factor to consider when selling your property is whether to sell with tenants in situ, as this may be more appealing to property investors. Read our blog on selling a rental property with tenants for more information. 

In this article, we look at possible ways to reduce a hefty final CGT bill or avoid capital gain tax altogether. 

What is capital gains tax? 

CGT is a tax on the profit you make by selling certain assets. The CGT on property sales is higher than on the profits you may make on selling other assets. CGT only applies when you sell a property that is not your primary residence, and the rates vary depending on your tax band. 

When do I have to pay capital gains tax on buy-to-let? 

Since 27 October 2021, the deadline for paying capital gains tax has been 60 days. This means that if you sell a buy-to-let property, you must ensure that the capital gains tax is calculated and the CGT bill payment is made to HMRC within 60 days of completion. 

Payments for capital gains tax are made through the Government Gateway, and failure to make the payment on time could result in a penalty fee and interest. 

Want to know more? Explore rental income tax and how to work out rental yield.

How do I calculate my capital gains tax bill? 

To determine how much CGT you are liable for, deduct the purchase price from the sales price. You can also deduct legitimate costs, such as legal fees, stamp duty, and the cost of any improvements to the property – but costs associated with general upkeep can’t be deducted. 

If you have a portfolio of properties, you can also offset the losses you made when selling other rental homes. For example, making a £50,000 loss when selling one property will increase the tax-free gain you can make when selling another. 

Everyone has an annual CGT personal allowance. For the tax year 2024/25, this is £3,000, which has been significantly reduced from £12,300 in 2022/23 and £6,000 in 2023/24. Only gains above the allowance amount are taxed. 

Deduct your annual GCT allowance from your gains; you must pay Capital Gains Tax on this amount. Add this amount to your total taxable income to determine whether you pay the lower or higher rate of CGT. 

If you are in the basic rate tax band, you will pay 18% CGT on any profits from your sale. If you are in the higher tax rate band or are an additional rate taxpayer, you will pay 24%. You can use an online capital gains tax calculator to work out how much CGT you are liable for. 

How can I reduce my capital gains tax bill on buy-to-let property? 

You can do several things to cut the amount of CGT you will pay on selling your buy-to-let property, but you should always take professional advice first. 

1. Make the most of your tax-free allowance 

In the tax year 2024-25, each individual’s tax-free allowance is £3,000. For the tax year 2023-24, the tax-free allowance was £6,000. You should ensure you use your annual exemption, as it cannot be carried forward into future tax years. 

If you have already used all or part of your CGT allowance for the year, consider delaying the sale until the next tax year so you can make use of your full allowance. 

2. Consider joint ownership with a spouse 

If you and your spouse jointly own the property, you can combine your tax-free allowances – giving a total allowance of £6,000 for married couples and civil partners for the tax year 2024/25. The combined tax allowance for the tax year 2023/24 was £12,000. If your spouse is in a lower tax band than you, this could also help cut the final bill. 

If you are the sole owner of the property, you could consider transferring all or part of the property to your spouse, allowing you to reduce your CGT liability when you come to sell. Transferring assets to your spouse or civil partner does not usually incur CGT and can reduce your CGT bill by optimising both yours and your spouse’s allowance. 

3. Deduct your costs 

There are three types of costs you can deduct from your capital gain. These are: 

• The incidental costs you incurred when buying and selling the property, including solicitors fees, estate agent and surveyors fees. You are not permitted to include mortgage interest payments. 
• Stamp Duty Land Tax when buying the property 
• The cost of improvement works which enhanced the value of your asset, routine maintenance costs do not count 

4. Set up a limited company 

CGT only applies to sales of residential properties owned by individuals. Increasingly, buy-to-let landlords are setting up limited companies to manage their portfolios and reduce tax liability.  

Profits made selling properties through a limited company are subject to corporation tax, which is 19% for small companies who make a profit of £50,000 or less. 

The standard corporation tax for companies with profits of over £50,000 is 25%. Sole traders and partnerships pay CGT on gains from business assets, including property. 

5. Offset losses 

If you dispose of an asset at a loss, this can be offset against your CGT liability. For example, poor-performing shares and stocks can be sold, and the loss you make can be offset against your CGT. 

6. Reduce taxable income 

One way to reduce your taxable income is to contribute towards your pension, which can provide tax relief. Another way to reduce your taxable income is to make charitable donations. 

There is also potential to reduce taxable income by investing in an ISA, as there is a £20,000 allowance each year for this type of investment. ISAs are exempt from CGT, and for higher tax rate payers, investing in an ISA is an effective way to reduce tax liability. 

Another option that is slightly more complicated is investing in a ‘bed and ISA’ which involves selling investments to realise a capital gain and then immediately rebuying the investment within your ISA. While you may need to pay CGT if the gains are over the allowance, the investment will be protected from tax in the future. 

Want to find out more? Take a look at the non-resident landlord scheme and find out what expenses you can claim as a landlord.

7. Check whether you’re entitled to private residence relief or letting relief 

Private residence relief 

If you have lived in your buy-to-let property for a period, you may be entitled to some Private Residence Relief (PRR). You can claim tax relief for the years that the property was your principal residence and the last nine months before the sale. 

For example, if you bought a property in January 2012 for £350,000 and sold it in January 2022 for £500,000, you would make a capital gain of £150,000. However, if you lived in the property as your main residence for the first five years and rented the property out for the final five, you are entitled to tax relief for 69 months (60 months you were living there plus nine months before the sale). In this example, you would only have to pay CGT on £63,750 of the gain. 

Calculated as: 150,000 – (150,000/120 x 69) 

If you only let out part of your home, you will need to work out what proportion you lived in; you only get private residence relief on this proportion. 

Lettings relief 

If you lived in your property with your tenant, you might qualify for lettings relief up to £40,000. 

Continuing the example above, if you had also lived in the property for the final five years when you had a tenant, you could claim lettings relief for this period. You would need to decide what proportion of your home you rented out, say you decide that your tenant’s room accounted for 20% of the property.

You made a chargeable gain of £75,000 in the second 5 years, but you can only claim private residence relief on £60,000 (80% of the total gain). However, you are entitled to letting relief on the remaining £15,000 related to the room you let out. 

Can Non-Residents Avoid UK Capital Gains Tax? 

No, it is not generally possible for non-residents to avoid UK CGT. The government introduced the NRCGT (Non-Resident Capital Gains Tax) in 2015, which meant that non-residents are required to pay CGT on disposing of assets including residential property.  

However, non-residents can claim relief for periods that the property was their primary residence. Non-residents must inform HMRC of the disposal of UK property within 60 days of completion and the tax is calculated from the date NRCGT was introduced in April 2015. 

Do You Pay Capital Gains Tax On An Inherited Property? 

If you sell a property that you have inherited, CGT will be applicable for any gains made from the property valuation at the time the estate is valued, to the date of sale.

If the house is sold quickly after the transfer of ownership, there is less chance of a large gain amount as the property may not have increased in value significantly. The individual CGT allowance can be used to reduce any CGT payable. 

Changes to CGT in 2025 

While significant increases have been introduced to CGT rates for gains that are not for residential property, the CGT tax rates on residential property remains at 18% for basic rate taxpayers and 24% for higher taxpayers for the 2025/26 tax year. 

The CGT allowance of £3,000 in the 2024/25 tax year also stays the same. When the changes to CGT rates were announced in the Autumn 2024 Budget, the government refrained from increasing CGT on residential properties, with the decision believed to be based on concerns around how it would impact the UK property market. However, tax changes could be introduced in future. 

A warning! 

CGT is a complex business, and the rules and allowances change frequently. If you want to sell, we strongly recommend you seek advice from a financial advisor before trying schemes to reduce or defer CGT. 

If you have decided to sell your buy-to-let property in Lancaster Gate, Earl’s Court or Fitzrovia, get in touch with our experienced sales team today. We can ensure you achieve the best possible sale price. 

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