Tax on a property portfolio: the charges that arrive on sale
The tax on a portfolio is not only the tax on the rent. The largest bill usually arrives when you sell.
Landlords focus on income tax because it arrives every year, but the largest single charge on a portfolio is usually capital gains tax on disposal, and it comes with a deadline that is shorter than most people expect.
The rules change, and the figures below should be confirmed before acting. What does not change is the structure of the problem: gains are taxed on the increase in value, reliefs are limited, and the reporting deadline is tight.
How the charge works
Capital gains tax is charged on the gain — the sale proceeds minus the purchase price, minus allowable costs such as stamp duty, legal fees and capital improvements. The rate depends on the taxpayer's income and on the type of property.
- Residential property gains are charged at higher rates than gains on most other assets
- An annual exempt amount applies to each individual, and it is much lower than it once was
- Allowable costs include acquisition costs and capital improvements, but not repairs or maintenance
- Losses on other disposals can be offset against gains, and must be claimed
- Principal private residence relief applies to a property that was your main home, with rules on periods of absence
The 60-day deadline
Residential property disposals must be reported and the tax paid within 60 days of completion, not by the following January as with most self-assessment liabilities. This is the rule that catches people out, because the deadline is short and the penalty for missing it is automatic.
The practical implication is that the tax has to be calculated and funded at completion, which means the money has to be available. On a sale with a substantial gain, the tax can be tens of thousands of pounds, and it is due within two months regardless of whether the proceeds have been reinvested.
Planning points
The most valuable planning is done before the sale rather than after. Spreading disposals across tax years uses more than one annual exempt amount, and transferring a beneficial interest to a spouse can use their exemption and their lower rate where they have less income.
Where a property has been a main residence for part of the ownership, principal private residence relief can be substantial, and the final period of ownership is treated as qualifying in most cases. Establishing the qualifying periods is worth doing properly, because the relief can be worth more than every other planning point combined.
Common questions
- How long do I have to pay capital gains tax on a property sale?
- For residential property, the gain must be reported and the tax paid within 60 days of completion. That is much shorter than the self-assessment deadline most people expect, and the penalty for missing it applies automatically. Make sure the money is available at completion.
- Can I avoid capital gains tax by reinvesting?
- Not for residential investment property. The reliefs that allowed deferral or rollover for certain business assets are narrow, and buy-to-let residential property generally does not qualify. Reinvesting the proceeds does not defer the charge, which is why the tax has to be planned for rather than avoided.