How to avoid capital gains tax when selling a property

Capital gains tax (CGT) is a tax that you pay when you sell certain valuable items for more than you paid for them – in other words, you’ve made a gain on the sale. For example, if you bought a second home several years ago at £200,000 and sold it for £300,000, you’d pay a percentage of your £100,000 profit — or capital gain — to the government in CGT.

When you make money from selling a house or property, your CGT depends on whether you lived in the house and how long you lived there.

Each year, there’s a certain amount of profit you can make in capital gains that’s exempt from tax – more on this allowance below.

What you pay CGT on

You may have to pay CGT if you make a profit (gain) when you sell property that’s not the home you live in, for example:

• Buy-to-let properties
• Business premises
• Inherited property

You don’t usually need to pay tax on gifts to your husband, wife, civil partner or a charity.

Yes. CGT does not apply when you sell your home if you meet the following criteria:

• You have one home and you’ve lived in it as your main home for the entirety of your ownership
• You haven’t rented out part of it – this doesn’t include having a single lodger
• You haven’t used part of only for business purposes
• The land, including all buildings, are less than 5,000 square metres (just over an acre) in total
• You didn’t buy it just to make a profit

It doesn’t require you to do anything to get this exemption. You’ll automatically get a tax relief called “private residence relief”.

If your property isn’t exempt from CGT, there are ways to reduce the bill.

Deduct costs

Most taxpayers tend to calculate their gains by deducting the purchase price from the selling price. In many cases, they forget that they can deduct any costs in buying or selling the property such as estate agents’ fees and solicitors’ fees, as well as any costs incurred that have added value to the property, such as an extension or garage improvements.

For example, let’s say that years ago you paid £100,000 for a house as an investment. Since then, you’ve made £15,000 in improvements, and sold the house for £200,000. In buying and selling, you paid a total of £5,000 in fees to solicitors and estate agents. In this case, when you sell the house, your capital gain will £80,000 (which is £100,000 minus the £20,000 spent on home improvements and fees). And you can also deduct your annual tax-free CGT allowance from that gain if you haven’t already used it up.

Private residence relief

If you owned a home but only used it as your main residence for part of that time, when you sell it you can get tax relief for:

• The period that you lived in your home
• The last 9 months that you owned the home

For example, you make a profit of £100,000 when you sell a home that you owned for 20 years. You lived in the whole property for 15 years and 9 months, then you let it out in full for 4 years and 3 months. You get private residence relief for the time you lived there (15 years and 9 months) plus the last 9 months you owned the property (even though you weren’t living in it), which totals 16 years and 6 months (or 16.5 years).

This means you get private residence relief for 16.5 of the years (82.5% of the time) that you owned the property. As a result, in this case you will only be taxed on 17.5%, or on £17,500, of your profits.

Letting relief

If during the ownership of your home, you rented out your home, or let out a portion of it, you could be liable to pay tax on portion that it was let out of when you sell the property.

However, if you can show that the property was genuinely your main residence for a period of time, you may may be able to claim letting relief, which will further reduce your CGT bill.

It’s important to note that you can’t claim private residence relief and letting relief for the same period. This means if you are letting the property out when you come to sell, the past 18 months qualify for private residence relief rather than letting relief.

The exact amount of private residence relief and letting relief you can get depends on the amount you sell the home for. However, it’s important to remember that having a single lodger – ie someone that lives in the home with you – doesn’t count as letting out your home, so you will be exempt from CGT.