If you are a landlord in the UK, and are thinking about selling your property, an essential part of this process includes assessing the Capital Gains Tax (CGT) applied to your sale.
CGT is calculated only on the Profit made from selling your property, not on the full sale price. Due to this, it is crucial that you know what deductions and reliefs can be claimed in order to minimise your tax bill.
In this guide, we will explain how capital improvements such as adding an extension to your property or upgrading the kitchen, is different from regular maintenance costs.
This blog will cover two main points:
- Expenses that are deductible when calculating CGT
- How reliefs like Private Residence Relief & Letting Relief can reduce your Tax Liability
Capital Improvements vs Depreciation
Depreciation in the UK
Unlike some countries (such as the U.S.), the UK does not allow any depreciation as a tax deduction for rental properties.
Depreciation is the gradual offsetting of cost of a property against income over a longer period of time.
However, this is not permitted in the UK. This means that, as a UK landlord, you can not claim depreciation on your rental property in the hope of reducing your rental income or your Capital Gains tax.
You can only claim tax reliefs on actual expenses incurred such as repairs and maintenance of your property.
Capital Improvements & CGT
Since you cannot claim depreciation to reduce your rental tax income, HMRC has allowed you to factor in capital improvements into your Capital Gains Tax calculation, when selling properties.
Capital improvements are enhancements that increase the property’s value or extend its lifespan. These costs cannot be deducted from your rental income but can be included in the CGT calculations in order to reduce the taxable profit upon the actual sale.
Examples of Capital Improvements are:
- Adding a new kitchen or bathroom
- Building an extension or conservatory
- Replacing the roof or upgrading the property’s structure
- Installing a new heating system
Non-Deductible Maintenance Costs:
These are some of the routine maintenance or repairs that are not considered as improvements or enhancement of the property.
- Fixing a leaking roof (unless it’s a full replacement)
- Repainting walls or minor repairs
- Replacing broken windows
While such costs can often be deducted from rental income during ownership, they do not reduce your Capital Gains Tax liability when selling the property.
Capital Gains Tax (CGT) Overview
When you sell a rental property in the UK, you are owed Capital Gains Tax on the profit acquired from that sale. This taxable amount is calculated as:
Sale Price – Original Purchase Price – Allowable Expenses = Taxable Gain
(Explanation is given under Allowable expenses)
The UK Government has set certain CGT rates. The current rates (2025/2026) for property are:
- 18% for basic-rate taxpayers
- 24% for higher/additional-rate taxpayers
- 32% for individuals for carried interest gains
- 24% for trustees
- 24% for personal representatives of someone who has died (not including carried interest gains)
- 32% for personal representatives of someone who has died for carried interest gains
- 14% for gains qualifying for Business Asset Disposal Relief and Investors’ Relief
Important Note: You also have an annual CGT allowance (£3,000 in 2025/26), meaning the first £3,000 of gains are tax-free.
Allowable Expenses for CGT Calculation
As a UK landlord, you can deduct certain costs from your gains, which help in reducing your overall tax bill. These costs include:
- Legal fees (from both purchase and sale)
- Estate agent fees
- Surveyor/valuation costs
- Capital improvements (e.g., extensions, new kitchens—not routine repairs)
- Stamp Duty Land Tax (SDLT) paid when buying the property
This means that you are allowed to deduct these expenses from your overall Profit after selling the property, hence paying lesser tax on the profit.
Example:
Mike buys a property for £200,000, and later sells the same property for a price of £300,000. The allowable expenses in this scenario have cost him £20,000 including legal fees, agent fees and the improvements done to the property. Applying the calculation formula for the taxable amount would be:
Sale Price – Original Purchase Price – Allowable Expenses = Taxable Gain
£300,000 – £200,000 – £20,000 = £80,000
This £80,000 is Mike’s taxable gain and this figure will be used to calculate how much CGT he owes to HMRC.
Private Residence Relief & Letting Relief
There are two major key reliefs that can further reduce your CGT liability. These are:
1. Private Residence Relief (PRR)
If the property being sold was your main home at any point of its possession, you may qualify for PRR, which exempts a portion of the gain from CGT.
This means either part of, or all of the gain may be tax-free.
- Full relief applies if you lived in the property as your only or main residence for the entire ownership period.
- Partial relief applies if you lived there for only part of the time, and then rented out the property. This is calculated based on time lived vs. rented out. In this scenario, the final 9 months of the property ownership may still qualify for the relief.
Example 1: Full Private Residence Relief – No CGT Owed
Scenario:
- You bought a house in 2010 for £200,000
- It was your main residence the whole time
- You sold it in 2024 for £350,000
Capital Gain = £150,000
Since you lived in the property for the entire period, 100% of the gain is covered by PRR.
CGT due: £0
2. Letting Relief
Letting Relief was applied to home owners who rented out their property that was once their primary residence.
This relief underwent substantial changes in 2020. Now, letting relief is only applied to homeowners who have lived in their home at the same time as their tenants (e.g., a tenant living in one room of the property).
You Can Claim the Lowest of:
| Option | What It Means |
|---|---|
| The same amount you got as Private Residence Relief (PRR) | If you got £30,000 of PRR, this becomes your maximum cap for Letting Relief |
| £40,000 | This is the maximum limit for Letting Relief set by HMRC |
| The gain made from the part of the home that was rented out | This is how much profit (capital gain) came specifically from the rented part, like the spare room |
Claiming the lowest” means HMRC will only let you deduct the smallest value out of the three options — even if one of the others is higher. It’s a way to cap the relief so you’re not reducing your Capital Gains Tax by more than you’re entitled to.
When it comes to how much Letting Relief you can actually claim, HMRC basically says:
“We’ll let you deduct some of your gain, but we’re going to cap it at the lowest of these three things.’’
If you’re a landlord who rented out part of your home (say, a room that’s 20% of the property) for 4 out of the 10 years you lived there, and you made a £100,000 profit when selling, only a portion of that gain relates to the rented area. You calculate the gain from the left portion like this: £100,000 × 4/10 (years rented) × 20% (space rented) = £8,000. Then you compare this £8,000 with the amount of Private Residence Relief (say, £60,000) and the HMRC cap (£40,000). Since £8,000 is the lowest, that’s the maximum Letting Relief you can claim to reduce your Capital Gains Tax.
Bottom line? You can only claim the smallest of those three amounts — not the one that works best for you.
So it’s a bit of a reality check from HMRC: they’re helping, but just enough to be fair (not overly generous).
So if you’re wondering, “Can I knock a big chunk off my tax bill because I rented out my spare room?” — The answer is maybe, but only up to a point. That’s Letting Relief in real life.
Need Help With Your Capital Gains Tax Bill?
Selling a rental property? Don’t pay more tax than you need to! Our specialist tax advisors can help you:
- Maximise reliefs (Private Residence Relief & Letting Relief)
- Claim all allowable expenses (legal fees, improvements & more)
- Calculate your exact CGT liability
- Legally reduce your tax bill
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