While you probably won’t be able to avoid capital gains tax on rental property (CGT) completely if you sell a buy to let property (BTL), there are some ways to cut the amount of CGT you will need to pay when you sell the BTL at a profit.
You can reduce the amount of capital gains tax you pay on property sales that are not your primary residence, by utilising your tax-free allowance, taking joint ownership with a spouse, deducting relevant costs, setting up as a limited company and checking if you qualify for private residence relief.
Ultimately the best way to minimise your capital gains tax bill is to make sure you know the rules that relate to CGT and BTL property and stick within them.
As the rules around CGT can get quite complex, plus for basic-rate income tax payers the sale could take them into the higher rate tax band, it might be better to get professional tax planning advice and guidance on how to lessen the impact of CGT on the sale of BTL property.
At CloudCo we are on hand to help with your buy-to-let financial affairs from our Property and Buy-to-Let Accountants. Read on to find out more…
Why do you pay capital gains tax on buy-to-let property?
The owner of a buy-to-let (BTL) property will be liable for capital gains tax on buy to let on the “gain” (profit) from selling the property.
It is the same when other valuable assets are sold (e.g. things over £6,000, including jewellery, artwork, shares, but not your car) and when the seller has made a profit.
CGT liability can be owed on residential property, but usually no one pays CGT on the sale of their main place of residence (where private residence relief applies).
The way to report and pay CGT on a buy-to-let property changed in April 2020; it was amended on 27 October 2021 (from 30 days to 60 days).
Since 2020, reporting the gain made on the property should not be held off until next tax year, but rather more or less reported and paid immediately (within 60 days of the completion of the sale).
So, you have 60 days to calculate, notify and pay the correct CGT you owe HMRC, which is not a very long time.
Beware: you may have to pay interest and a penalty if you fail to notify HMRC of the sale within the same tax year.
For example: If you sell a rental property on August 8, 2025, you must calculate, report, and pay any CGT you owe to HMRC by October 7, 2025.
This is a tight deadline, so it is essential to have your financial records in order and be prepared to act quickly
How is CGT calculated on buy-to-let property?
Most buy-to-let properties will be subject to capital gains tax (CGT). CGT is charged at 24% (for higher-rate taxpayers) or 18% (basic-rate taxpayers) on any profit made on the value of the property since it was purchased.
Basic rate taxpayers hopefully will have worked out carefully or sought some professional tax planning advice from an accountant before they decided to sell a BTL property: as the gain or profit from selling a BTL will be added to your income, the sale could push you into to higher-rate tax band.
As every taxpayer has a tax-free capital gains allowance of £3000 (2025–26), CGT is only due on the gain over this threshold.
There are also allowable costs the owner/seller of the BTL can offset, including:
- Stamp duty from your original purchase
- Solicitor fees from selling a rental property
- Estate agent fees from selling a rental property
- The cost of any capital improvements including an extension, work to improve energy efficiency, a new kitchen
Property owners are not allowed to offset outgoings such as upkeep of the property or mortgage interest payments.
Do you pay capital gains if you reinvest in another property in UK?
Yes, you will pay CGT even if you sell your BTL property and immediately reinvest the proceeds of the sale into another property.
But CGT is not charged on the total proceeds from the sale of your BTL property: you minus the sum you paid for the property 10 years ago, plus you can offset costs like solicitor’s and estate agent’s fees and stamp duty.
The beneficial tax treatment for Furnished Holiday Lettings (FHLs) has been abolished from April 6, 2025. This means that FHLs are now taxed in the same way as standard buy-to-let properties. The previous rules, which allowed owners to claim rollover relief if they sold one holiday let to purchase another, no longer apply.
Another way you could consider if you wish to continue to invest in property is to put money into a Real Estate Investment Trust (REIT).
In this scenario you could benefit from gains in the property market while simplifying issues around CGT and corporation tax that direct investment inevitably brings, and which avoids the additional layer of taxes that can arise when you invest through a corporate structure.
A real estate investment trust (REIT) is a property investment company that exists largely to simulate direct investment in UK property.
You won’t pay corporation tax on rental income or gains from sales of investment properties (and shares in property investment companies) when operating through an REIT.
Shares in these sorts of investment can be held in an ISA (subject to ISA limits) so are probably exempt from tax.
Ways to reduce your CGT bill on buy-to-let property
There are ways to minimise your CGT bill and make the most of tax relief and tax-free allowances on property sales that are not your primary residence.
Here are some of the ways, but you should always seek expert advice.
1. Make the most of your tax-free allowance
Everyone should make use of their annual tax-free allowance (£3000 for 2025-26 tax year), which cannot be carried forward into future tax years.
And anyone considering selling a BTL property who may already have used all or part of their tax-free allowance should consider delaying the sale of the property.
Married couples and civil partners could consider combining their tax-free allowances to benefit from a total tax-free allowance of £6000.
2. Consider joint ownership with a spouse
If you’re married or in a civil partnership and the property is owned by only one of you, consider transferring all or part of the property to your spouse to reduce your CGT liability on the sale.
Married couples or civil partners can double their CGT tax-free allowance. Consider also that if your spouse or civil partner is in a lower tax band, then transferring over some of their tax-free allowance offers another way to minimise the bill.
3. Deduct your costs
Make sure you deduct the allowable costs from your capital gain discussed above under the heading “How is CGT calculated on buy-to-let property?”
4. Set up a limited company
As CGT only applies to sales of residential properties owned by individuals, many BTL landlords have set up limited companies to reduce their CGT liability.
Profits made on the sale of a rental property through a limited company are covered by Corporation Tax, not CGT. For the 2025-26 financial year, the small profits rate of Corporation Tax is 19% for companies with profits under £50,000, and the main rate is 25% for profits over £250,000 (with a marginal relief for profits in between).
This can be a tax-efficient strategy for higher-rate taxpayers who would otherwise pay the 24% CGT rate.
Find out how we can help you form a limited company here.
5. Check whether you’re entitled to private residence relief or letting relief
Private Residence Relief (PRR) is available if you made your BTL property your principle residence before you sold it. PRR entitles you to claim the relief for the years you lived in the property, plus for the nine months before the sale.
Example
You purchased a property in March 2015 for £350,000 and sold it in March 2025 for £500,000.
Your total ownership period is 120 months, and you made a profit of £150,000. You lived in the property as your main residence for the first five years (60 months) and rented it out for the last five years.
You are entitled to PRR for 69 months (the 60 months you were living there plus the final nine months of ownership).
The taxable gain is calculated on the portion of time the property was rented out, which is 51 months (120 – 69).
FAQs
How to avoid capital gains tax on rental property?
Use your annual allowance, consider joint ownership, deduct allowable costs, and consider setting up a limited company. Living in the property as your main home can also help through Private Residence Relief.
What is the current capital gains tax rate on buy-to-let properties?
For 2025/26, 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on gains exceeding the £3,000 allowance.
How to avoid capital gains tax on second homes in the UK?
It is generally difficult to avoid paying CGT on second homes, but it can be reduced by using the annual CGT allowance, deducting allowable costs or by claiming PRR.
Can living in my buy-to-let property reduce CGT?
It is possible to make your buy-to-let property your main residence at least for 2 years of the 5 years before selling, then you may qualify for Private Residence Relief (PRR), which can reduce or eliminate CGT on part of the gain. The last nine months of ownership also qualify for relief.
Can I avoid capital gains by buying another house?
You cannot avoid capital gains tax (CGT) by buying another house because roll-over relief does not apply to buy-to-let properties. CGT must be paid on any profit from the sale within 60 days. To reduce CGT, use allowances, deduct costs, consider joint ownership, or hold property in a limited company.
How to avoid paying tax on rental income?
It is not possible to avoid paying tax on rental income completely if you are profitable but it can be reduced by claiming expenses and using tax reliefs.
Conclusion
You can definitely minimise the CGT burden when you make a capital gain or profit on the sale of your BTL property, but it is virtually impossible legally to avoid paying it altogether, unless, of course, you make a loss on the purchase price when you come to sell it.
The best thing to do to pay as little CGT within the law is to seek tax planning advice and professional guidance in relation to CGT, where planning ahead is key.
Contact CloudCo today for help with your buy-to-let property.
