Advice on Avoiding Capital Gains Tax on Your Property

Capital gains tax is only applied to properties that are considered assets. This usually means second homes, buy-to-let properties or rentals. However, it may also apply to your lived-in home if you run your business out of part of it. In that case, you may have to pay CGT on the business part of your property. 

If you want to avoid CGT, you’ll need to think a long way ahead of time and plan out your living arrangements before selling. This is because if you own two or more properties, you need to declare which one is your main residence. According to this forum response by the HMRC, you have two years to do this. If you don’t declare your main residence, the HMRC will make the decision for you. 

This is actually how former Secretary of State for Scotland of the United Kingdom, Danny Alexander, avoided paying capital gains tax on his London property back in 2007. According to the Guardian, Mr Alexander proved to the HMRC that his London home was his primary residence.

“He did not break any rules, but used a tax loophole that allows the continued designation of a property as the main home for three years even after the purchase of another house...which has become the principal residence,” Patrick Wintour and Matthew Taylor wrote in the 2010 article. 

The controversy around Mr Alexander’s situation isn’t based on his avoidance of CGT, but rather his taxpayer-funded expenses by saying this property was his second home, not his primary residence, to the House of Commons. So there’s nothing wrong or illegal in doing this with your second home. 

Here’s the UK Government’s official advice on nominating your main home. You basically have to write to the HMRC and register to vote from that residence. If you move out of this property (e.g. you buy another one), you have a nine-month leeway to sell the property before it might be considered your second home. 

A big caveat here is you need to be able to prove that you live in this property, or have lived in it at most nine months ago. So you can’t simply declare a rental property with tenants in it as your primary residence. In this case, you would need to make sure the property is vacated in advance, around two years. This gives you time to submit the required paperwork to the HMRC, as well as proof of habitation, such as being registered to vote there.

The first two years after your purchase property are important if you want to avoid paying CGT. In the UK, if you live in the property as your main residence within two years of owning it, you’ll be eligible for tax relief. In fact, the gov.uk website states that you get relief for this period “even if you nominated a different home as your main home”.

Another effective way to get relief from CGT is by building or renovating your property. If you can prove to the HMRC that you couldn’t live in a property during the first two years of owning it because you were building or renovating it, you should be entitled to relief. 

This was the situation in the case of HMRC vs Lee as published online by Tax Adviser Magazine. In this case, Mr and Mrs Lee had purchased a property in the UK on October 2010 then knocked down the existing residence. Afterwards, they spent around 29 months building their new home. They moved into the property in March 2013, before selling it just over one year later in May 2014. 

The HMRC’s stance was that the Lees should only be entitled to CGT relief for the time they lived in their new home (about 14 months). Also that their period of ownership began when they purchased the land with the property they eventually demolished. This meant they would’ve been liable to pay capital gains tax for the period between October 2010 and March 2013 (those 29 months they were building the property). 

Mr and Mrs Lee, meanwhile, took the stance that their period of ownership only began when they started living in the new property they built. The First-tier Tribunal ruled in favour of the Lees, agreeing that the Lee’s interest in the land only began when they had a “dwelling-house” they wanted to live in. As a result, the Lees were able to avoid paying any capital gains tax.

If you can prove your property is your main residence and only want to gift it to your spouse or a child, you should be exempt from capital gains tax. However, you’ll still be liable for CGT if the property you’re gifting is your second home, a buy-to-let home or another residence that isn’t your primary. 

In the case of the latter, you won’t have a sale value for the property to determine the profit. Because of this, the HMRC will usually use a market valuation to determine what you’ve gained how much CGT you need to pay. 

Remember that tax-free exemption we mentioned at the start? You can use this to slightly reduce the amount of CGT you pay on a property sale. It’s only £3,000 for each individual, but there are a couple of ways you can increase it. 

The first is putting the property in two names. This could be you and your spouse or another individual, such as a co-owner, relative or friend. Jointly owned assets, including property, are assessed based on the portion you own. So if you and your spouse are selling a house that you own equally, you can both apply the £3,000 tax-free exemption on your individual profits from the sale. You’re essentially getting £6,000 in tax-free gains.

The other option applies to owners who are selling multiple properties. Let’s say you have two residences you want to sell. As the tax-free exemption cannot be carried over into the next financial year, and you can’t combine two financial year exemptions into one year, you can reduce your CGT liability by selling the two properties in different financial years. 

This way, you can utilise the £3,000 tax-free exemption from one financial year on one property, then the same amount from the next year on your other property. If you sell them both in the same financial year, you’ll only get one lot of £3,000 to use. 

Sarah Bradford wrote an article about this method for Tax Insider. In this case study, the homeowner was able to reduce his CGT payment for a house sale down from £37,324 to £30,598 (saving £6,726) by putting the property in joint names. 

Certain expenses you incur when selling a property can be deducted from your profit to help reduce your capital gains tax. The HMRC explicitly states the following as potential deductions: 

• Fees from estate agents and solicitors

• Any money you’ve spent on home improvements, such as extensions or renovations

You can also claim the stamp duty you paid when you purchased the property. In the age of online estate agents, such as Zoopla and Purplebricks, it may also be possible to claim any advertising costs through these platforms. 

There are certain expenses that you won’t be able to claim as deductions. These include: 

• General upkeep and decorating costs

• Utility bills

• Mortgage interest

• Home insurance premiums

It’s important to keep track of all your expenses when selling your property, because these can greatly impact the amount of CGT you’re liable to pay. Francis, Wilks & Jones, a law firm with over 20 years’ experience, provides a case study concerning this on its website. 

The law firm claims that it was able to reduce the HMRC’s capital gains tax assessment for a client by 75%. They were successful in doing this because they were able to prove that the “client had not gained as much from the disposal of the property as they had calculated because his capital expenditure was much greater than shown in their figures.”

So, although it may be a bit more admin during an already busy time, keeping a log of your expenses could potentially reduce your CGT payment by as much as 75%, or even higher.

Your overall tax bracket for the financial year will change how much capital gains tax you’ll need to pay. Similarly, if you have losses from other investments you’ve made, you may be able to use these to offset your gains from selling your property. This could reduce or effectively eliminate CGT, depending on how many losses you incurred. 

UK Property Accountants also advises that you might want to delay the sale of your property if you’ve had a high-income financial year. If you know that in the next year you won’t have as much income to declare, and you’ll be on a lower bracket, you could save yourself money by selling your house later. In some cases this could mean waiting one or two months. 

There are other ways to lower your taxable income, such as making charitable donations and reinvesting in ISAs. The latter are exempt from capital gains tax. You can’t do this with property, but it might be possible for other investments on your portfolio. 

If you can’t reduce your taxable income enough to lower your bracket, you could transfer the ownership to your spouse if they’re on a lower bracket. That way you’ll pay a lower amount of capital gains tax on the profit from your sale. 

This method takes advantage of the ‘no gain no loss’ law in the United Kingdom. It’s essentially a law that allows spouses and civil partners to transfer assets, such as property, without incurring CGT. The UK Government has more detailed information on this if you’re interested.

If you’ve let part of your property out for residential purposes at any point during your occupancy, you’ll only be entitled to partial capital gains tax relief. This applies even if you’ve used it as your main home. 

However, the UK Government does offer additional savings in the form of letting relief. Letting relief only applies to homeowners who have lived in their residence but also let part of it out to tenants. If you’ve rented the entire property out, it doesn’t apply. 

According to the UK Government, the amount of letting relief you’re entitled to will be the lowest value out of the following three options: 

1. Whatever Private Residence Relief you’ve already been afforded

2. £40,000

3. The letting relief you’re afforded because of your rental situation

Here’s a quick example of this playing out. 

Let’s say you rented out 75% of your property to tenants for the entire time you lived in it as your main residence. Then when you sold the property, you made £80,000 in profit. You would be able to claim 25% of the gains as Private Residence Relief, which would be £20,000. The remaining gain of £60,000 comes from the letting relief (number 3 in the list above). As the PPR is the lowest amount out of the three options, you would be entitled to additional letting relief of £20,000. So you would have to pay capital gains tax on the remaining £40,000. 

The HMRC affords partial CGT relief depending on your circumstances. You can read through the entire list of situations where partial relief is possible for more details. In short, you may be eligible for this if you’ve: 

• Used part of your home for business purposes

• You’ve lived in the property for some periods

• The property was nominated as your main home for certain periods

• You’ve rented out part of your property

• You’re selling land which hasn’t been developed or sold after your property

• 12/05/2025 - Content rewritten by Karl McArdle and fact-checked by Kirsty Rowett.

• 12/05/2025 - Content updated in line with Editorial Guidelines (Reviewed by Mathew McCorry)