Advice on Avoiding Capital Gains Tax on Your Property
Understanding CGT is crucial when selling a second home
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Avoiding Capital Gains Tax on property - is it hard?
Looking To Avoid Capital Gains Tax? Here's how.
Whether you are selling a second home or a piece of land, being well cultured in the art of avoiding Capital Gains Tax (CGT) should be a necessity for any seller. While understanding Stamp Duty Land Tax is a necessary requirement if you are looking to purchase a property.
Capital Gains Tax allowance was reduced significantly for the first time in 35 years in 2023, but this was relatively short-lived and CGT was increased in October 2024.
Which is why understanding CGT is crucial when you look to sell a property as it is considered one of the heftiest profit taxes. By neglecting to do your research, you're almost ensuring that you end up paying the price... literally.
Although that being said, avoiding Capital Gains Tax on a property isn’t impossible.
To help you master the basics and get your head around how to avoid Capital Gains Tax in 2024, we present to you our quick and easy guide on all things CGT.
What is Capital Gains Tax on Property(CGT)?
Capital Gains Tax, or CGT for short, is a percentage fee payable to the government on any profits made through the sale of property, stocks and other high value assets.
This isn’t to say, though, that all of your profit will be taxed, with Capital Gains Tax only applying to a part of your profits.
You're liable to pay CGT as soon as you sell any of these assets, providing of course it has increased in value. If not, you'd be exempt, and in some cases be able to use that loss to lower the amount of tax you'll pay elsewhere (more on that later).
You see, each year, everyone (including children) get what's known as an Annual Exempt Amount, which is a CGT allowance under which any profits will not be taxed. At present, this is £6,000 (2023/24) with it expected to drop further to £3,000 (2024/25).
The amount of CGT you pay will also depend on the amount of time that you've held the asset - in this case, your property.
The longer you've held it, the smaller the percentage of CGT will be. These are what's known as short term and long term Capital Gains Tax. A technicality that's useful to know about when you're planning how to avoid CGT.
You're only liable to pay CGT on any property that isn't your primary place of residence - i.e. your main home where you have lived for at least 2 years.
So it's landlords, investors and people with second homes or Buy To Let portfolios who really need to keep their ears open.
How much is Capital Gains Tax on Property?
Capital Gains Tax is not a universal amount, and will vary depending on quite a lot of factors to do with your own situation as well as the asset.
How do you work out capital gains tax on Property?
When it comes to working out your Capital Gains Tax on property, your first port of call should be to consider what type of taxpayer you are.
Out of all factors, this is usually what will have the most significant impact on what you'll pay, aside from the value of the asset of course.
To do so you first need to work out your taxable gains, which is the amount of money you've made from the asset after deducting any allowable losses.
Then, you would deduct the CGT tax-free allowance, which would leave you with a sum that is subject to CGT.
For example (2024):
Taxable gain = £15,000. Allowable losses = £2,000.
Calculate total taxable gain:
£15,000 - £2,000 = £13,000.
CGT tax-free allowance = £6,000.
Calculate amount subject to CGT:
£13,000 - £6,000 = £7,000.
Once you have calculated the taxable amount (£7,000), then you can work out the percentage of Capital Gains Tax you are liable to pay.
All of which depends on whether you're a basic or higher/additional rate taxpayer.
| Band | Taxable income | CGT rate for residential |
|---|---|---|
| Personal allowance | Under £12,570 | 0% |
| Basic rate | £12,571 - £50,270 | 18% |
| Higher rate | £50,271 - £125,140 | 28% |
| Additional rate | £125,140+ | 28% |
Calculate what rate taxpayer you are:
Amount subject to CGT = £7,000.
Your annual income = £35,000.
Taxpayer:
£7,000 + £35,000 = £42,000 (Basic rate - 20%).
Understanding Capital Gains Tax bands:
If you are within the higher or additional rate tax bracket then you will pay:
28% on gains from residential property.
20% on gains from other chargeable assets.
If you are within the basic rate tax bracket, then you will pay:
18% on gains from residential property.
10% on gains from other chargeable assets.
Calculate CGT Tax:
£7,000 / 18% = £1,400.
If you're 'disposing' of a property which is abroad and are a resident of the UK, you will still be subject to the usual charges, that is of course unless you brush up on avoiding Capital Gains Tax.
Can't be bothered doing all the sums? Let this Capital Gains Tax Calculator do the work for you!
How to report and pay capital gains tax on property
It's one thing getting all your documents in order, but something else actually paying CGT. You can pay Capital Gains Tax in 2023 via the government's website:
Create a 'Capital Gains Tax on UK property' account here. Without one you'll be unable to declare or pay any form of CGT.
Submit a CGT calculation of what you think you owe in Capital Gains Tax (HMRC may make amends).
If HMRC does make amends to your calculation, check why they've been made and if there's any that you don't understand, reach out to them directly.
Pay your Capital Gains Tax bill.
You can use this account to make other tax declarations in the future, so write down your username and password in a safe place.
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When do you pay capital gains tax?
So, now that you're clued up on what Capital Gains Tax is and how it's calculated, you're probably wondering how you go about paying it.
Is it deducted from the proceedings of your sale upon completion? Or, are you liable to pay it yourself?
You pay Capital Gains Tax within 30-days of making the gain. In the case of selling a property, this would be 30-days from your completion date.
But, before you can go ahead and make payment, there are a few details that you'll need to get your hands on first:
The address of your property including the postcode.
The date on which you acquired the property.
The date at which contracts were exchanged.
Your completion date - in other words, the day you formally stopped being the property's owner.
Confirmation of the price that you bought the asset for, as well as its final sale value (i.e. your Sold Price).
But don't forget…
Evidence of any costs that came with improving the property, be it a new roof or re-landscaping the garden.
Details of any tax relief or costs that you incurred when disposing of the asset. In the case of your property, this could be agent's fees.
Can I move into my buy-to-let property to avoid Capital Gains Tax?
If you are looking at avoiding capital gains tax on property, then you may be able to benefit from Private Residence Relief, however, you will only be exempt from CGT for the amount of time that you occupy the property and any gains that you made in the final 9 months before the sale.
How long must you live in a house to avoid capital gains tax on property?
If the property that you are currently selling is your only home, then there is no CGT UK to pay. This is called Private Residence Relief (PRR) and is applied when a homeowner sellers their primary and sole residence.
However, if the property is not your only home, then you will need to have lived in the property for the entire ownership in order to avoid capital gains.
In order to make a property your permanent residence, you must have lived in it for at least a year. HMRC defines your permanent residence as:
The place where you and your family spend the most time
Where the owner is registered to vote
Where the owner is registered with doctors and dentist
If the owner has children, where do they go to school?
Is it illegal to avoid CGT UK?
In the UK, it is illegal to not pay capital gains tax when it is owed, however, there are certain circumstances where you may not be required to pay CGT.
By taking steps such as using your tax-free allowance, increasing your pension contributions, deducting your cost, and using your yearly ISA allowance you can legally avoid paying as much capital gains tax as you may have originally owed.
How can I avoid capital gains tax in 2024
If you have calculated your CGT payment and are horrified by the result, you may be wondering if there are any ways to avoid paying Capital Gains Tax on property?
You’ll be happy to know that there is in fact a way to minimise (and even completely avoid) Capital Gains Tax on property in 2023. Yes, believe it or not, such a thing really is possible!
How to reduce Capital Gains Tax in 2024:
1. Downsize your portfolio strategically
Every UK resident gets a tax-free allowance of £6,000 before Capital Gains Tax is charged, so making best use of it relies on not just property sales, but strategic property sales.
Basically, sales which are timed to ensure each year this allowance is fully used up.
Landlords using this strategy would look to downsize gradually, opposed to simply flogging half their portfolio overnight. Sell 10 houses over 10 years and you'll take the benefit of 10 times as much tax relief.
2. Use your spouse for avoiding Capital Gains Tax
There's more perks to a partner than just kids and their company - you can also use them to reduce your tax liability too!
As a large part of CGT is based on your annual income, if you (the landlord) are a high rate taxpayer, but your partner doesn't work, then you may be in luck.
Sell the property in their name and you'll be charged the lower rate of CGT as they will be classed as a base rate taxpayer.
3. Offset your expenses against your CGT
You can reduce your Capital Gains Tax liability by offsetting any losses against gains in the same tax year.
When you buy an asset like a house, you hold them for a period of time and then sell them forwards, just like a product based business would do. And, like any business, you can offset these expenses against the tax bill.
If your losses exceed your gains then you will be able to carry these losses forward indefinitely and offset them against any future gains, provided you have registered them with HMRC.
For example, if you paid £3,000 to a landscaper and carried out a £5,000 roof renovation, which added £9,000 in value to your property then you may only pay tax on the £1,000 the improvements added.
How to avoid Capital Gains Tax in 2024
1. Avoid CGT by refinancing a house instead
Avoiding Capital Gains Tax altogether could be as simple as a speedy refinance. Reason being that when you refinance a property, you refinance it based on its current value.
If you originally bought your house for £80,000, but now it's worth £160,000, your re-finance options will be based on that figure of £160,000.
Therefore, if your new mortgage is 25% Loan-To-Value (LTV), you'll be able to pull out 120,000 —- all without paying a single penny in Capital Gains Tax.
You're taxed on forms of profit, not debt (i.e. mortgages), so in this instance, you'd be left with £120,000 for a house that cost you £80,000+ which you can continue to rent out each month.
2. Change your primary place of residence
Avoiding Capital Gains Tax could be as simple as moving house for two years. You see, the one property sale where you don't pay CGT is the sale of your primary residence; you only pay capital gains for any property that would be classed as an investment.
So, if you're thinking of selling a second home that's worth significantly more than your current home, then calling it your Primary Place of Residence could save you significantly more cash. Do so and like magic, you'll avoid CGT completely.
3. Gift your property to your child through a trust
The number one way for you to avoid Capital Gains Tax in 2023 is to give the property to your child via a trust. Providing that you have got a child and a property worth under £650,000 that's fully paid off, that is.
Not only can it help you avoid CGT, but it can also help you escape Stamp Duty and Inheritance Tax too!
However, it's not the easiest to wrap your head around, so while we have included an example below, we would suggest contacting a trusted accountant before getting serious.
For example:
You purchased a property for £100,000 which has now increased in value to £200,000.
Instead of selling the property, you decide to gift it to your child via a trust fund.
This can be a great way to avoid Capital Gains Tax, maintain a rental income and at the same time, provide your child with valuable business knowledge; while also managing to avoid Stamp Duty Land Tax (SDLT) completely.
If you decide to not pay CGT then you will have to agree to a TCGA Section 260 which is part of tax legislation and allows you to use your lifetime inheritance tax-free allowance instead of paying Capital Gains Tax.
By using the Section 260 you would manage to dodge the Inheritance Tax charged at 40%, or £80,000 (using the example).
Each person in the UK has a lifetime Inheritance Tax-free allowance of £325,000. So as a couple you could use this strategy to funnel up to £650,000 worth of property into a trust. Where it can remain for up to 9 years.
If you're worried about avoiding Capital Gains Tax this way because your child hasn't properly settled down yet, there's no need to be. Because it's in a trust and not in their ownership, in the case they get a divorce you will not lose the property.
How can you avoid Capital Gains Tax on inherited property?
In the United Kingdom, when you inherit a property, you generally don’t have to pay Capital Gains Tax (CGT) immediately. However, CGT may become relevant if you decide to sell the property later.
Firstly, if you make the inherited property your main home, you may be eligible for Principal Private Residence Relief, which can exempt you from Capital Gains Tax for the period the property was your main residence, plus the final nine months of ownership, regardless of use.
Secondly, CGT is calculated on the increase in value of the property from the time you inherited it to the time you sell it. The property is usually revealed at the date of the deceased’s death, which becomes the new base cost for CGT purposes, which can reduce the potential gain.
Using the Annual Exempt Amount, you may be able to offset the gain from the inherited property against your Annual Exempt Amount, if it does not go over, then you will avoid Capital Gains Tax on inherited property.
What expenses are deductible for Capital Gains Tax UK?
When it comes to selling a property that is not your main residence, there are certain allowable deductions that you will be able to subtract from your final bill. You should be careful to consider:
Private Residence Relief
Solicitor fees
Estate agent fees
Stamp Duty
Eligible costs of improvement (new kitchen, extension, renovation)
You can also help to further reduce your cgt uk bill by:
Offsetting your losses from other assets you may own
Keep a record of costs and deduct as appropriate
Make use of spousal allowance (if you qualify)
Is there a penalty for not paying capital gains tax?
Those who fail to pay CGT within the 30-day window can receive a penalty, as well as interest on top of that. As you'd imagine, the fine increases depending on how long you've defaulted:
Default for up to 6 months = £100.
Miss a payment for longer than 6 months = an additional penalty of £300 or 5% of the due amount - whichever is greater.
Fail to pay CGT for over a year = an additional penalty of £300 or 5% of the due amount - whichever is greater.
If you've completely forgotten to pay your Capital Gains Tax and are worried about how it will affect your credit score, don't be. HMRC or any local council will not share any info about your payment history with any credit reference agencies.
Has CGT UK Changed In 2024?
The Capital Gains Tax allowance from 1988/89 to 2020/21 increased from £5,000 to £12,300 where it remained until 2022/23. In April 2023/24 the CGT allowance was reduced to £6,000.
There is a suggestion that In 2024/25 that the CGT will be further halved to £3,000.
The Government estimates that in total, the drop of CGT allowance from 2022/23 would mean that over 1,000,000 more individuals would be liable to Capital Gains Tax.
If you are a higher rate taxpayer (in particular, a Buy To Let Landlord), you can expect to see your expenses rise quite sharply, if they haven’t already.
If you wish to sell off a second home or a large chunk of a portfolio, then you may need to act fast and find a way of securing a quick property sale. Which isn’t easy when agents will try their best to persuade you into crossing your fingers and hope for the best.
In most cases, selling on the open market simply won’t cut it, especially when selling a house via an estate agent could take you 100+ days.
Thankfully though, fast house sales aren't actually that hard to come by, providing of course you know where to look.
Take us for example. As a cash buyer of property across England and Wales, we can buy your second house in just seven days!
Our team has in excess of 50 years' combined experience in fast house sales and is well equipped with the industry know-how you need to get your property sold in record time.
We will buy any property, in any condition, in any location. We will buy your property whether it's in need of repair, is a tenanted property or is ready to move in.
We'll even cover the cost of your surveys and legals too, as a special thank you! So what do you have to lose? Avoiding Capital Gains Tax has never been so easy...
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