How to avoid capital gains tax in the UK

If you’re planning on selling your home or a second property, you’ll need to know about capital gains tax.

Depending on your financial situation and the amount you might or might not “gain” from any sale, you may need to pay capital gains tax.

Capital gains tax is a straightforward tax, but it can pay to understand the intricacies of some of the rules around it.

You don’t only pay capital gains tax on property – it can be liable on any sale of personal possessions worth £6,000 or more (apart from your car) as well as stocks and shares.

For this article, we’re only looking at capital gains tax as it applies to selling property, whether this is your home or a buy-to-let investment.

If you know the rules you might be able to reduce your capital gains tax bill by making smart decisions around selling up. Here’s what you need to know:

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Capital gains is a tax on any profit that you make when disposing of something you’ve made considerable “gains” on, such as a buy-to-let property. (In this context ‘disposing’ means selling, giving away, swapping, or getting compensation for an asset.)

What we mean by “profit” or “gain” is usually the difference between what you paid for something and what you sold it for. You subtract the amount you paid originally from the value now and capital gains tax is payable on the difference.

If there has been considerable capital growth on the value of your property, it might be a big “gain”, which might mean higher capital gains tax.

Let’s say you bought a rental property for £450,000 and sold it for £550,000. You made a profit of £100,000, so that’s the part you need to pay capital gains tax on. How much you pay exactly depends on your financial position and tax bracket.

The calculation can be a bit complicated, so it’s always worth checking with the experts. For example, sometimes a market value might be used instead of a sale price. This might be if you inherited a property, for example.

You can use this government calculator to work out your capital gains tax bill on property.

But there are special rules for calculating your profit in certain situations,  such as if you live abroad or are selling a lease or part of your land

If your property is subject to a compulsory purchase order or if it’s part of the estate of someone who has died, there are also different rules.

So make sure you read up on all the variables.

Find more information about Capital Gains Tax how it works.

Capital gains tax doesn’t normally apply to your primary residence. For property, it’s more usual if someone owns more than one home, or has a buy-to-let investment property.

You will usually not have to pay capital gains tax when you sell your home as long as you meet the following criteria:

• You have lived in it as your main home all of the time you have owned it.

• You have not rented any of it out or used part of it for a business.

• The land your home is on is smaller than 5,000 square metres or just over one acre

If you do have to pay capital gains tax on your home, it is charged at a rate of 18% on any gains for basic rate taxpayers and 28% for higher rate ones. (Remember “gains” means the difference between the amount it was worth when you bought it and the amount you are selling it for).

You have an annual capital gains allowance (more on which, below) so you won’t pay tax on all the profit you make. There may be other ways to reduce your bill, too.

Find out more about the criteria and calculations for capital gains tax in this guide.

While it might not always be possible to avoid capital gains tax when selling your second home or a buy-to-let property, you can make smart choices to minimise it.

Here’s what to think about:

One way to avoid capital gains tax completely is to only own one home, which would be subject to Private Residence Relief.

Find out more about Private Residence Relief.

If you have more than one property and live between them, make sure the one you are selling is your “primary residence” well in advance of selling up.

You couldn’t, for example, rent out one of your properties and then designate it as your primary residence a year before selling and then not pay capital gains tax on it. You need to actually live in it and be able to prove this.

Only homes that you live in can be nominated for Private Residence Relief. You need to nominate a home as your primary residence by being registered to vote there and by notifying HMRC.

So, if you know years in advance that you want to sell one of your homes, you can do the paperwork (registering to vote and notifying HMRC) so that when it comes to selling up this home is ineligible for capital gains tax.

We'd recommend you take independent financial advice before doing this.

While it may not be possible to avoid paying capital gains tax, you can certainly deduct relevant costs to help reduce your bill.

Key selling costs including estate agents’ and solicitors’ fees, as well as the stamp duty you paid when buying the home, can be deducted.

You might even be able to deduct the cost of certain home improvements, so do talk to your financial advisor who will be able to confirm what is and isn’t eligible for deduction from your overall “gain”.

The tax-free allowance (also known as the Annual Exemption Amount, which is currently £3,000 a year) applies to individuals and not a specific property.

This means that if you’re married or in a civil partnership, you can double what you claim off your capital gains tax when you come to sell.

So if you share ownership of a home you can knock £6,000 off your “gains” bill.

We mentioned earlier that you get a tax-free allowance each year (although the amount changes depending on the government).

It’s not possible to roll your tax allowances over into another year. It’s “use it or lose it”, so it makes sense to spread your capital gains tax across more than one year.

If you’ve got more than one property to sell, make sure you only sell one per tax year to make sure that you get the maximum allowance in each case.

The idea of selling off assets in chunks makes slightly more sense when it comes to shares and other assets than bricks and mortar. But if you’re a landlord with multiple properties or you can sell off parts of a portfolio, it’s still worth considering.

Plus, if you’ve already used up your Annual Exemption Amount, consider delaying a sale until the following tax year.

If you have decided to give your home to your partner or children then it mostly likely won’t be eligible for capital gains tax, so long as you can prove it is your primary residence.

If you decide to give a property to family that isn’t your primary residence (say a holiday or buy-to-let home), then you are still going to need to pay capital gains tax on the value you have “gained”. This will be calculated with a market valuation.

As we explained earlier, the amount of capital gains tax you are set to pay depends partly on your financial situation and current rate of tax.

If you are a higher rate taxpayer and your spouse or partner is a low earner, then you might decide to transfer the ownership of a second home or buy-to-let into their name.

The “gains” in terms of how much profit has been made on the home might well be the same when you come to sell (it would be based on the difference in value between when you bought the property and when they sold it), but a lower rate taxpayer will pay a lower rate of capital gains tax.

Bear in mind that this may not be the case if you’re separated and don’t live together at all.

If you don’t meet all the criteria for Private Residence Relief, you may still get partial relief under certain circumstances.

Let’s say you used part of your home exclusively for business purposes, or rented part of your home out to tenants. You would typically get relief for the proportion of the property that you lived in as your main ‘residence’.

You may get less Private Residence Relief if you lived away from your home. But you get full relief for the years that you lived in your home. You also qualify for full relief for the last nine months that you owned your home, even if you didn’t live there at the time.

You may also be able to claim relief if you sell a home provided for a ‘dependent relative’, such as an elderly member of the family.

Can I avoid capital gains tax on second homes?

The short answer is no. But if you follow the steps laid up above, in terms of understanding the allowances and liabilities, you can avoid paying more tax than you need to.

How can I make sure I’m eligible for Private Residence relief?

Do read up on the government website in case anything changes; but in a nutshell, in order to be eligible for Private Residence Relief:

1. No part of your home should have been used as exclusively as a business

2. Your home shouldn’t have land bigger than 5,000sq m

3. You shouldn’t sublet any of the home (even to a single lodger)

4. You didn’t buy the home with the sole intention of making a gain

5. You shouldn’t have another property that can be provable as your main home

6. You have to be resident in the UK for tax purposes

Can I get capital gains tax relief for business?

You could also be entitled to relief if you sell a property that’s used for business. This could cut or delay the amount of capital gains tax you owe.

There’s no simple answer to this question as HMRC provides different criteria.

If you have only one home and it meets the criteria for Private Residence Relief you won’t have to pay any capital gains tax.

If you have more than one home or your circumstances don’t meet the Private Residence Relief criteria, you may still be eligible for partial relief.

What is the capital gains tax allowance?

You pay capital gains tax on profit above an annual threshold, which is currently £3,000 per person. If you co-own a home with a partner or spouse, this doubles to £6,000 as you’re eligible to £3,000 each.

What is Letting Relief?

If you rented out part of your home while you lived there, you may be entitled to Letting Relief. It applies to the chunk of property that is rented out. The relief is the lowest of either:

• the amount of Private Residence Relief you qualify for

• £40,000

• the profit you get from renting out part of your home.

What is the 36-month rule?

Previously, if you owned one home and were disabled or in long-term residential care, you could get full relief for the last 36 months of ownership. This has changed since 2020 however, and the exemption period is now nine months.