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Capital Gains Tax (CGT) can take a significant amount out of your profits when selling a property. If it’s a second home, buy-to-let, or inherited property, the tax implications can feel overwhelming. But what if you could legally reduce or even avoid capital gains tax altogether?
This blog will explore how you can avoid capital gains tax on property, what reliefs and allowances you might be missing, and which strategies can help reduce your CGT bill. Having an expert, such as MMBA Accountants, by your side can also help a great deal.
Table of Contents
What Is Capital Gains Tax?
Capital Gains Tax is a levy on the profit (or gain) you make when selling a chargeable asset, such as UK property, investment property, or business assets. ‘Chargeable assets’ include property and other assets subject to CGT, and gains on these assets are calculated for tax purposes.
A capital gain is the increase in value when the selling price exceeds the purchase price and associated costs. The selling price is the final amount received from the property sale, which is used in the CGT calculation. You don’t pay tax on the full sale amount just the gain you’ve made, i.e., the difference between the purchase price and the sale proceeds, minus any allowable deductions (like legal fees and estate agent fees). The CGT calculation involves deducting allowable costs and reliefs from the selling price to determine the taxable gain.
If you’re wondering “how can I avoid capital gains tax on property?”, the key is to understand when and why it applies, and then plan ahead using the tips below.
1. Make Use of Your Annual Exempt Amount
Each tax year, individuals are entitled to an annual exempt amount (also called the capital gains tax allowance). For the 2025/26 tax year, it’s £3,000 per individual. Other allowances may also apply, such as the trading allowance.
The personal allowance for income tax is separate from the CGT annual exempt amount, but both can affect your overall tax position.
If your taxable gain is below this threshold, you won’t need to pay CGT at all. Couples (including spouse or civil partner) can double up this relief potentially realising up to £6,000 tax-free if the asset is jointly owned.
Tip: Time your property sale to fall across two tax years to make use of two annual exemptions if selling multiple properties or other assets.
2. Transfer the Property to Your Spouse or Civil Partner
Assets transferred between spouses or civil partners are CGT exempt. So if one partner is a basic rate taxpayer and the other is in a higher tax band, consider transferring ownership (or a share of it) to the lower-earning partner. When you transfer assets in this way, it is treated as a no gain/no loss disposal for CGT purposes, meaning there is no immediate capital gains tax liability.
This approach reduces the overall taxable income and, in turn, lowers your capital gains tax rate which is:
- 18% for basic rate taxpayers
- 28% for higher/additional rate taxpayers (on residential property)
Note: The transfer must be a genuine gift, not a sale, to benefit from the CGT exemption.
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3. Claim Private Residence Relief
If the property was your main residence at any point during ownership, you may be eligible for Private Residence Relief. This can reduce or eliminate the capital gains tax liability.
For example, if you lived in the home for 8 years and rented it out for 2, you’d only pay gains tax on the period it wasn’t your main home minus the final 9 months, which are automatically exempt under PRR rules.
4. Lettings Relief for Rental Properties
If you’ve rented out your former main residence, you may also qualify for lettings relief, which offers additional relief (up to £40,000) on gains tax but only if you shared occupancy with the tenant. Rental income from the property must also be reported and is considered separately from capital gains for tax purposes.
This relief has become more limited in recent years, but in combination with private residence relief, it can still make a big dent in your CGT bill.
5. Offset Allowable Deductions
You’re allowed to deduct costs related to the purchase, sale, or improvement of the property, which reduces the taxable gain.
Common allowable deductions:
- Legal fees
- Stamp duty
- Estate agent fees
- Improvement costs (e.g., adding an extension not general repairs)
- Surveyor costs
By subtracting these from your chargeable gain, your capital gains tax liability may fall into a lower tax band or be eliminated entirely.
6. Consider Selling in a Year of Lower Income
Your capital gains tax rate is influenced by your taxable income. If you’re taking a career break, retiring, or expecting a lower-income year, that might be the best time to sell a property.
A lower income could keep you within the basic rate band, making the CGT rate just 18% on residential property, compared to 28% if you’re in a higher tax band.
Strategy: Defer the sale or bring it forward to a year where you’ll be earning less.
Making additional pension contributions can also reduce your taxable income, which may help you stay in a lower CGT band.
7. Invest in Tax-Efficient Schemes
The government offers several schemes that allow you to defer or reduce CGT. These include:
Some investors also use strategies like selling and rebuying the same investments within an ISA (known as ‘Bed and ISA’) to shelter future gains from CGT.
Enterprise Investment Scheme (EIS)
Investing in qualifying companies may allow you to defer CGT on property sales and get income tax relief.
Business Asset Disposal Relief
If the property qualifies as a business asset, such as furnished holiday lets or properties used in trade, you may be eligible for a 10% CGT rate far lower than standard rates.
8. Use a Limited Company
Holding investment property through a limited company can be more tax efficient, especially for portfolio landlords. Many landlords set up limited companies to benefit from lower corporation tax rates on profits, which can be more advantageous than paying capital gains tax (CGT) as individuals.
Instead of capital gains tax, companies pay corporation tax on profits (currently 25%). Plus, you can retain profits within the company, reinvest in new properties, and benefit from deductible expenses.
Warning: Transferring existing properties into a company triggers stamp duty, potential CGT, and mortgage complications. Seek advice first.
9. Plan for Inherited Property
If you are selling an inherited property you’ll pay CGT on the capital growth between the market value at inheritance and the sale price. Other taxes, such as inheritance tax, may also apply depending on your circumstances.
To reduce your tax bill:
- Sell when the market is favourable.
- Deduct improvement and legal costs.
- Use your annual allowance.
- Explore dependent relative relief if the property was used to house an elderly or disabled dependent before 1988.
10. Property Sale Considerations
When it comes to reducing your capital gains tax bill, the timing of your property sale can make a significant difference. The capital gains tax implications of a sale depend not only on the gain itself but also on your overall taxable income for the tax year. If you are a basic rate taxpayer, you may want to plan your property sale so that your total taxable income, including the gain, does not push you into a higher tax band otherwise, you could face a higher capital gains tax rate.
It’s also wise to consider the annual exempt amount, which is £3,000 for the 2024/25 tax year. If you have other taxable income or gains in the same tax year, you might benefit from deferring your property sale to a year when your income is lower, helping you stay within a lower tax band and reduce your overall tax liability. By carefully planning the timing of your sale, you can maximise your annual exempt allowance and minimise your cgt bill, keeping more of your capital gains in your pocket.
Structuring the sale to minimise gains
How you structure your property sale can also have a big impact on your capital gains tax liability. Start by ensuring you deduct all allowable costs such as estate agent fees, solicitor’s fees, and the costs of any improvements you’ve made to the property from your gain. For those selling a buy-to-let or second home, it’s important to understand how private residence relief and letting relief might apply to your situation, as these can significantly reduce your cgt bill if you qualify.
Major life events, such as divorce or the death of a spouse, can also affect how your gains are taxed, so it’s worth considering the timing and structure of your sale in relation to these events. Consulting a financial adviser or tax expert can help you identify available tax reliefs and ensure you’re structuring your sale in the most tax-efficient way possible. With the right advice, you can navigate the complexities of capital gains tax and take full advantage of all available tax reliefs, reducing your tax liability and keeping your gains tax-efficient.
11. Overseas Property Considerations
Overseas property considerations include:
Tax implications for non-UK properties
If you own property outside the UK, it’s important to understand the capital gains tax implications when you decide to sell. As a UK resident, you may still be required to pay capital gains tax in the UK on the sale of overseas property, regardless of where the property is located. This means your capital gains tax bill could include gains tax on both UK and non-UK assets, depending on your tax status and the rules in the country where the property is situated.
In some cases, you may be able to claim relief in the UK for any tax paid overseas on the same gain, which can help reduce your overall tax liability. The timing of your sale, the way the property is owned (individually, through a company, or via a trust), and the annual exempt amount all play a role in how much capital gains tax you’ll pay. It’s also essential to understand how your gains from overseas properties fit within your annual exempt allowance and how they interact with your other taxable income.
Given the complexity of international tax rules and the risk of double taxation, seeking advice from a tax professional with experience in cross-border property transactions is highly recommended. They can help you navigate the capital gains tax implications, ensure you comply with both UK and foreign tax laws, and help you minimise your tax bill while avoiding costly penalties.
12. Consult a Tax Adviser or Financial Adviser
The best way to avoid capital gains tax on property is through proper planning and often, that requires professional insight.
A qualified tax adviser or financial adviser can help:
- Forecast future gains
- Understand your CGT allowance
- Time your property sale
- Calculate your cgt liability
- Identify overlooked tax reliefs
- Advise you on your obligations when it comes to paying capital gains tax and ensure you meet all deadlines
And most importantly, ensure you’re staying on the right side of the law because tax evasion is illegal, even if tax planning is not.
Conclusion
There are many ways to minimise your tax burden, however, it’s hard to completely avoid capital gains tax on property. With the right strategy if it’s using your annual exemption, timing your tax year, claiming tax relief, or planning with your spouse or civil partner you can keep more of your gains in your pocket.
If you’re preparing to sell a buy to let property, rental property, or other assets, get ahead of your cgt bill now. If you intend to repurchase the same asset after selling, make sure to wait at least 30 days before buying back to avoid triggering anti-avoidance rules. Start planning, get expert advice, and stay compliant.
Frequently Asked Questions
Do I have to pay capital gains tax on my main residence?
No, if the property has been your main residence throughout ownership, it is usually exempt from capital gains tax due to Private Residence Relief.
Can I avoid capital gains tax by gifting property to my spouse?
Yes, transfers between spouses or civil partners are exempt from CGT, allowing you to split ownership and reduce the overall tax liability.
What costs can I deduct from my capital gain?
You can deduct costs like stamp duty, legal fees, estate agent fees, and certain property improvement costs to reduce your taxable gain.
How does my income affect the CGT rate on property?
Your income determines your CGT rate 18% for basic rate taxpayers and 28% for higher rate taxpayers on residential property gains.
Can I use my annual exempt amount every year?
Yes, each tax year you get a CGT allowance (currently £3,000). If not used, it can’t be carried forward, so plan sales accordingly.
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