How to avoid capital gains tax when selling a property

Find out whether capital gains tax (CGT) is due on the sale of your property, plus tips to reduce CGT within the rules.

When you sell your main home, generally you don’t have to pay capital gains tax (CGT) on any profits you make. But it’s worth knowing the exceptions to the rule, as well as when CGT does apply to property sales. Read on to find out more.

What is capital gains tax?

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.

Does CGT apply only to property?

No. CGT generally applies when you make a profit from selling items that are worth more than £6,000, such as valuable art, and shares that are not kept within an ISA or PEP. If the price has gone up since you purchased an asset and you plan to sell it, you’ll typically pay CGT on the profit once you have used up your annual tax-free CGT allowance.

Is my primary residence exempt from capital gains tax?

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”.

How much will I have to pay?

You’ll need to work out your gain to find out whether you need to pay CGT. The amount you pay is based on your gain (usually the difference between the amount you paid for your property and the amount you sold it for) and the tax rate that applies to you.

Capital gains tax rates

The CGT rate you pay depends on which tax bracket you come under, which depends on your annual income. You can see the rates on the HMRC website in the CGT section.

Market value

In some situations it’s better to use the market value of the property when working out your gain.

How can I reduce capital gains tax on a property?

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.

The bottom line

Home ownership often comes with the headache of ultimately selling your home. By knowing more about the details of CGT, there are ways to get get tax relief and maximise the profits you make on your investment property.

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    20 Responses

    1. Default Gravatar
      MoiraFebruary 25, 2019

      I want to buy a retirement home and have time to renovate it before I sell/move from my current home. Can I do this without incurring capital gains on my current home as for a short period I will own 2 homes?

      • Avatarfinder Customer Care
        JoshuaFebruary 28, 2019Staff

        Hi Moira,

        Thanks for getting in touch with Finder. I hope all is well with you. :)

        For tax purposes, you can only have one primary residence. However, this doesn’t prevent you from getting multiple properties or homes. It just that, you can only claim one property as your principal residence.

        As long as you are selling a primary residence, you should still be eligible for capital gains tax exemption even if you have other homes.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!

        Cheers,
        Joshua

    2. Default Gravatar
      JonFebruary 22, 2019

      My wife and I purchased a mixed-use property 20 years ago. It is part commercial (a shop) and part residential. The total cost was £260,000. The value today is appx 1.4 million. The retail part is probably about £250,000. We lived in the residence for 11 years as a family and traded from the retail outlet.

      We then moved abroad and we continue to live abroad. We let out the retail outlet and the residential part, although a family member remained in a small residential flat which is also part of the building.

      Separately our daughter purchased a completely separate flat 15 years ago with our names on the deeds and the mortgage. We have never lived there and she has always paid the mortgage.
      The value has increased from £180,000 to £350,000.

      My questions are:
      If we sell our mixed-use property for £1.4 m and the retail part is valued at &250,000 within that figure, what CGT May we have to pay?

      If we then buy new property will that be considered as our primary home? Or will our names on our daughters flat affect this?

      If our daughter sells her flat but we take no profit from the sale ourselves are we free of CGT?

      Would she need to sell her flat before we invest in a new property so that our new property is not viewed as a second home?

      Can you unravel all of this for us, please. Thank you.

      • Avatarfinder Customer Care
        JoshuaFebruary 24, 2019Staff

        Hi Jon,

        Thanks for getting in touch with Finder. I hope all is well with you. :)

        Let me answer your question one by one:

        1. I can’t give you a straightforward answer to this question, Jon, since we are not tax specialists. However, to give you a general idea, CGT will be applied to the profit you make, which is selling price minus cost basis.

        2. That would depend on your situation. Your home is considered as your primary residence if you live there most of the time throughout the year. Moreover, you can also register that new home as your primary residence for legal and tax purposes.

        Regarding your daughter’s house, even if you own it, but you don’t live in it, then it won’t be considered as a primary residence.

        3. Legally speaking, it would be the owner of the flat who is responsible for paying the CGT. However, you can discuss this with your daughter and let her pay the CGT but under your name.

        4. That would be unnecessary since the flat isn’t considered your primary residence in the first place.

        Please note that we are not tax specialist and due to the complicated nature of tax laws, it would be a good idea to make your independent research and speak to a tax consultant for more information.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!

        Cheers,
        Joshua

    3. Default Gravatar
      PalwinderFebruary 19, 2019

      Hi! I have a question regarding CGT.
      I just want to know I bought residential property in 2014 lived there till 2017 and moved somewhere else in Jan 2018 as I got a job far away. I put my residential property for rent till now. So my question is, do I still have to pay CGT?

      • Avatarfinder Customer Care
        JoshuaFebruary 21, 2019Staff

        Hi Palwinder,

        Thanks for getting in touch with Finder. I hope all is well with you. :)

        The answer to your question is yes. You will most likely pay CGT on the profit you will make from the selling of your property. This is mainly due to the fact that you have rented out your property until now.

        You can know exactly how much CGT you will be paying by speaking to a tax specialist.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!

        Cheers,
        Joshua

    4. Default Gravatar
      EHFebruary 15, 2019

      I have owned a property for 30 years in the UK it is my only property.
      I have lived in it for two years and let family members stay in it for 11 years.
      I am now living in it for the past 6 months. It has been rented out for 18 years
      Will I have to pay CGT. property bought for 45000 and its value is 20000.00.

      • Avatarfinder Customer Care
        JoshuaFebruary 20, 2019Staff

        Hi EH,

        Thanks for getting in touch with Finder. I hope all is well with you. :)

        Based on the information you mentioned, EH, you will most likely pay CGT. The main reason is that you are selling a property which is not your primary residence.

        I would suggest that you speak to a tax specialist. You should be able to get a more personalised answer to your question.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!

        Cheers,
        Joshua

    5. Default Gravatar
      PeterFebruary 11, 2019

      I’m selling a shop for £140,000 which I bought £25,000 with a £10,000 5 year mortgage jointly with my wife in 1993. We intend to off-set the CGT by buying buy-to-let housing. Does it need to be done this financial year? Can you make other suggestions To offset the tax? The shop rental was an important part of our pension so it is important that we invest wisely.

      • Avatarfinder Customer Care
        JoshuaFebruary 17, 2019Staff

        Hi Peter,

        Thanks for getting in touch with Finder. I hope all is well with you. :)

        If you are selling a non-primary residence, then it is most likely that you would need to pay CGT. However, there are different ways for you to reduce CGT and you can read this above the page. Please read the information written under the subheading, “How can I reduce capital gains tax on a property?”

        Please note that tax laws can be very complicated. for this reason, it would be wise to speak to a tax specialist to obtain a more personalised answer and advice.

        I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

        Have a wonderful day!

        Cheers,
        Joshua

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