Capital Gains Tax on UK Property: A Guide for U.S. Expats
Selling UK property while living abroad or as a U.S. citizen involves tax obligations in both countries. The UK capital gains tax (CGT) allowance dropped to £3,000 for the 2025/26 tax year, down from £12,300 just three years ago. This means more American expats will owe UK tax when selling rental properties or second homes in the UK. You’ll also need to report the sale on your U.S. tax return, but strategic planning can help you avoid double taxation.
The bottom line: If you sell UK property at a gain, you have 60 days to report and pay UK CGT. You’ll report the same sale on your U.S. tax return, but you can claim a foreign tax credit to avoid paying tax twice. Most expats who sold rental properties won’t qualify for the UK’s letting relief anymore due to 2020 restrictions.
What Is Capital Gains Tax in the UK?
Capital gains tax in the UK applies when you sell or dispose of an asset that has increased in value. For U.S. expats living in the UK, this typically affects second homes, rental properties, or your main home if you’ve rented it out or used it for business purposes.
The tax applies to the profit you make, not the full sale price. You calculate your gain by subtracting the purchase price from the sale price, then deducting allowable costs like improvements, legal fees, and estate agent fees.
Get Clear Answers On Your UK Property Capital Gains Tax
How Much Tax-Free Allowance Do I Get?
For the 2025/26 tax year, you can make £3,000 in capital gains before paying any tax. This is your annual exempt amount, and it applies per person, not per property.
If you’re married or in a civil partnership and jointly own the property, you each get the £3,000 allowance, giving you £6,000 combined. This is a significant reduction from just a few years ago when the allowance was £12,300.
Take Note: This allowance has dropped dramatically:
- 2022/23: £12,300
- 2023/24: £6,000
- 2024/25: £3,000
- 2025/26: £3,000
What Are the UK CGT Rates for Property?
For residential property, UK residents pay:
- 18% if you’re a basic rate taxpayer
- 24% if you’re a higher or additional rate taxpayer
Your rate depends on your total taxable income for the year, including the capital gain. If adding the gain pushes you into the higher rate band, you’ll pay 18% on the portion within the basic rate and 24% on the remainder.
For property bought before April 6, 2015, you can elect to use the market value on that date as your purchase price, which may reduce your taxable gain.
Do I Qualify for Private Residence Relief?
You won’t pay UK CGT on the sale of your main home if you meet all these conditions:
- You lived in it as your only home for the entire time you owned it
- You didn’t rent out any part of it
- You didn’t use part of it exclusively for business
- The property and grounds are less than 5,000 square meters (about 1.2 acres)
- You didn’t buy it just to make a profit
If you meet these requirements, you don’t need to report the sale to HMRC.
The Final Period Exemption
Even if you moved out of your main home before selling, the final 9 months of ownership automatically qualify for relief. This grace period helps if you’re having trouble selling or have already moved to a new home.
For those in long-term care or with certain disabilities, the final exemption period extends to 36 months instead of 9 months.
Does Letting Relief Still Apply?
Letting relief still exists but was dramatically restricted in April 2020. You can now only claim it if you lived in the property at the same time as your tenant, like having a lodger under the rent-a-room scheme.
If you moved abroad and rented out your entire UK home, you no longer qualify for letting relief. This restriction caught many expats by surprise and significantly increased their UK tax bills.
When it does apply, letting relief can exempt up to £40,000 of gain (£80,000 for married couples), but it’s limited to the lowest of:
- £40,000
- The amount of private residence relief you’re claiming
- The gain attributable to the rental period
When Do I Need to Report and Pay UK CGT?
You must report the sale and pay any UK CGT within 60 days of completion, even if you normally file a self-assessment tax return. This applies to UK residents selling residential property.
This is a strict deadline. Missing it results in penalties and interest charges. You report through HMRC’s online UK property disposal service and pay at the same time.
For non-UK residents selling UK property, you must report within 60 days regardless of whether you owe tax or made a loss.
How Does This Differ From U.S. Capital Gains Tax?
As a U.S. citizen or green card holder, your worldwide income is taxable in the U.S., including gains from selling UK property. You’ll report the sale on your U.S. tax return in the year of sale, not when you pay the tax.
U.S. Primary Residence Exclusion
The IRS offers IRC Section 121, which excludes up to $250,000 of gain ($500,000 for married filing jointly) on the sale of your primary residence. To qualify, you must have:
- Owned the property for at least 2 of the last 5 years
- Used it as your primary residence for at least 2 of the last 5 years
- Not claimed the exclusion on another home sale within the last 2 years
The 2 years don’t need to be consecutive. If the property was also rented out, the exclusion is prorated based on qualifying and non-qualifying use.
Depreciation Recapture on Rental Properties
If you rented out the property and claimed depreciation deductions on your U.S. tax returns, you’ll owe depreciation recapture tax. The IRS taxes the depreciation you claimed at a flat 25%, even if you qualify for the Section 121 exclusion.
This catches many expats off guard. You might exclude the capital gain but still owe tax on the depreciation.
Foreign Exchange Rate Gains
Currency fluctuations between the pound and dollar create an additional taxable event for U.S. purposes. If it takes fewer U.S. dollars to pay off your UK mortgage than it took to obtain it, the difference is taxable as ordinary income.
Example: You took out a £200,000 mortgage when the exchange rate was $1.40/£1 ($280,000). Years later, you pay it off when the rate is $1.25/£1 ($250,000). The $30,000 difference is taxable as ordinary income in the U.S.
Unfortunately, if the reverse happens and you lose money on the exchange, that loss isn’t deductible.
How Do I Avoid Double Taxation?
When you sell UK property as a U.S. citizen or resident, you’ll report and potentially pay tax in both countries. The foreign tax credit prevents double taxation by allowing you to claim a dollar-for-dollar credit on your U.S. return for taxes paid to the UK.
You calculate the credit on IRS Form 1116. The credit is limited to the lower of the foreign tax paid or the U.S. tax on the same income. Because UK CGT rates (18%/24%) are generally lower than U.S. rates for higher earners, you’ll typically get credit for all UK tax paid.
Keep detailed records of all UK tax payments, including the 60-day payment, as you’ll need these when preparing your U.S. return.
What Records Should I Keep?
You’ll need comprehensive documentation for both UK and U.S. reporting:
- Original purchase documents and completion statements
- Receipts for improvements (not repairs or maintenance)
- Legal fees, estate agent fees, and survey costs
- Records of any rental income and expenses
- UK CGT payment confirmation
- Exchange rates on key dates (purchase, improvements, sale, mortgage transactions)
- Evidence of residence periods if claiming private residence relief
What Changed Recently That I Should Know About?
October 2024 Rate Changes
The UK increased CGT rates on non-property assets (shares, business assets) from 10%/20% to 18%/24% effective October 30, 2024. Residential property rates remained at 18%/24%.
April 2025 Domicile System Abolished
The UK replaced its domicile-based system with a long-term residence system. If you’ve been UK tax resident for 10 of the last 20 years, you’re subject to UK tax on worldwide income and gains. This affects long-term U.S. expats in the UK and their estate planning strategies.
Reduced Business Asset Disposal Relief
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) rates increased from 10% to 14% in April 2025 and will rise to 18% in April 2026. This affects U.S. expats selling UK businesses.
What Are My Next Steps?
If you’re planning to sell UK property:
- Calculate your estimated UK CGT liability using current rates
- Check if you qualify for any UK reliefs (private residence, business asset disposal)
- Gather documentation for both UK and U.S. reporting
- Set aside funds for the 60-day UK payment
- Plan for U.S. reporting and foreign tax credit calculations
- Consider timing implications for both tax years
Property sales are complex and have far-reaching tax consequences in both countries. Getting it right requires expertise in both UK and U.S. tax law.
Have questions about selling UK property or dual tax filing? We offer comprehensive UK and U.S. tax services to help American expats handle both sides of the equation. For general questions, contact our Customer Champions.
Let Us Handle Your UK Property Sale Reporting
This article provides general information for the 2025/26 tax year and should not be considered personalized tax advice. UK and U.S. tax laws change frequently, and individual circumstances vary. Always consult with qualified tax professionals for advice specific to your situation.
Related Resources
- U.S. Expat Taxes in the UK: The Complete Guide
- UK Tax Services for U.S. Expats
- Foreign Tax Credit: How to Avoid Double Taxation
- Buying and Selling Real Estate Abroad
- Form 1116: Claiming the Foreign Tax Credit
- U.S. Tax Return Preparation for Expats
- Small Business Tax Return Prep for Expats
- Why Do I Have to Pay U.S. Taxes If I Live Abroad?
- Foreign Earned Income Exclusion Guide
- Form 1040: U.S. Tax Return Guide for Expats
