Capital Gains Tax (CGT) can significantly impact the profits you make from selling property in the UK. Whether you’re selling your home, an investment property, or other assets, understanding how CGT works and how to minimise it is essential. In this guide, we’ll break down effective strategies for avoiding or reducing CGT on property sales.
What Is Capital Gains Tax?
Capital Gains Tax is levied on the profit you make when selling or disposing of certain assets, including property. The UK treats property as a chargeable asset, meaning CGT applies to the profit made on the sale. For 2024/25, the tax rates are:
- Basic Rate: 18% on gains within the £12,570 to £50,270 range
- Higher Rate: 24% for gains above £50,270
- Additional Rate: 28% on residential property above £50,270
When Does CGT Apply?
Capital Gains Tax is generally triggered when you dispose of a property. This can happen through:
- Selling the property for cash
- Exchanging the property for another
- Giving the property away (unless to a spouse or civil partner)
- Receiving an insurance payout for property loss or damage
It’s essential to consult with a tax professional when selling property, as various factors, such as the type of asset and the timing of the sale, can affect your CGT liability.
10 Ways to Reduce CGT on Property Sales
- Maximise Your Annual Exemption
Each taxpayer in the UK is entitled to a £3,000 capital gains tax allowance for the 2024/25 tax year. Be sure to use this allowance fully, as it cannot be carried forward into the next tax year. The more of this tax-free allowance you use, the less CGT you’ll pay. - Offset Losses Against Gains
If you dispose of assets at a loss, you can use that loss to offset against gains made in future years. This strategy, known as tax-loss harvesting, can help reduce your overall CGT liability. For instance, if you sell underperforming investment stocks at a loss, you can use the loss to lower the CGT on a more profitable property sale. - Gift Assets to Your Spouse
Transferring assets between married couples or civil partners is a tax-efficient way to save on CGT. Since both partners have their own annual exemption (£3,000 each), you can effectively double the amount of tax-free capital gains. Ensure the transfer is a genuine gift to benefit from this exemption. - Reduce Your Taxable Income
Since CGT is added to your income tax, reducing your taxable income can lower your CGT liability. This can be done by making pension contributions, claiming marriage allowance, or through salary sacrifices, reducing the overall amount subject to tax. - Buy and Sell Property Within the Family
The “bed and spouse” strategy allows a family member to sell a property to their spouse or civil partner, who can then transfer it back. This strategy allows the property to be sold at a lower taxable gain, as it will be recalculated based on the new purchase price. - Contribute to a Pension
Contributing to a pension can reduce your taxable income and, by extension, reduce your CGT liability. Higher-rate taxpayers can receive 20% tax relief, while additional-rate taxpayers can benefit from 25% relief on their contributions. This is a valuable tool for long-term tax planning. - Make Charitable Donations
Donating property or assets to a registered charity can help you avoid CGT. Not only do you receive a tax deduction, but the charity may sell the asset on your behalf, allowing you to avoid paying CGT entirely. This strategy also helps reduce inheritance tax. - Spread Gains Over Tax Years
If you anticipate large gains from selling property, consider spreading the sale over multiple tax years. By doing so, you can reduce the overall tax burden by avoiding jumping into higher tax brackets. This strategy works well for those with irregular or fluctuating income levels. - Maximise ISA Tax Efficiency
Using an Individual Savings Account (ISA) is a tax-efficient way to avoid CGT. Any gains made from assets held within an ISA are tax-free. Consider using a “bed and ISA” strategy, where you sell assets and immediately repurchase them within an ISA to ensure that all future gains are tax-free. - Invest in Small Companies
Investing in tax-efficient schemes like the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) can help you avoid CGT. These schemes offer 100% tax relief on capital gains, but they come with risks, so it’s important to seek professional advice before investing.
Avoiding CGT on Property Sales
To avoid paying CGT when selling your property, certain conditions must be met. If the property is your primary residence and you have lived in it as your main home throughout the period of ownership, you may qualify for Private Residence Relief (PRR). This relief can completely exempt you from CGT, provided:
- The property has been your main home during ownership
- You haven’t rented out part of the property or used it exclusively for commercial purposes
- The property is under 5,000 square meters
- You didn’t buy the property solely to make a gain
If you’ve lived in your property for an extended period, this exemption can significantly reduce or eliminate your CGT liability.
Tips for Avoiding CGT on Inherited Property
When inheriting property, CGT can be a concern, especially if the property has appreciated in value. If the inherited property is your primary residence, you may be exempt from CGT under the Private Residence Relief rules. However, if you choose to sell the property later, it may be subject to CGT. In such cases, it’s advisable to sell the property soon after inheriting it to minimise the potential for further appreciation and CGT liability.
Avoiding CGT on Overseas Property
When it comes to overseas property, the same principles apply. If you declare the foreign property as your primary residence to HMRC, you may be able to avoid CGT. The declaration should typically be made within two years of purchasing the property. However, if you decide to sell both a foreign and UK property in the same year, you could be liable for CGT. It’s essential to plan ahead and make the proper declarations to ensure you minimise your tax exposure.
Final Thoughts
Navigating Capital Gains Tax can be tricky, but with the right strategies in place, you can significantly reduce your liability. Whether you’re selling a primary residence, an investment property, or inherited assets, there are several ways to ensure you pay as little tax as possible. Always seek professional advice tailored to your specific situation to avoid costly mistakes and make the most of the available tax reliefs.
