No one wants to part with more of their hard-earned cash than they have to, so it’s little wonder the question of how to avoid capital gains tax on UK property sales pops up so frequently. As one would expect, however, it isn’t always possible to circumvent a CGT bill…and when you can, it may not be a straightforward process.
What is Capital Gains Tax?
Before we get to the crux of the matter, let’s take a brief look at what capital gains tax is. In short, it’s exactly as its name suggests: a tax on any gain made when something is bought or sold (property, in this instance). So, you only pay tax on the profit, not the overall sale price.
Before your brain starts whirring and you get too excited, there’s a caveat to bear in mind. The wording on gov.uk actually states that:
Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
‘Dispose of’ is the key term, and it can mean much more than selling, including:
- Transferring ownership to someone else
- Gifting the asset
- Swapping the asset for something else
- Being compensated for the asset, such as via an insurance claim, if it is lost or destroyed
Annual Exemption Amount (AEA)
As well as capital gains tax only being charged on profit made for the disposal of an asset, you’ll also have something called the Annual Exemption Amount (AEA) to take into account.
The AEA is a tax-free allowance granted to everybody, and if your profit falls below its threshold you can avoid paying capital gains tax altogether. At the time of writing, the current amount for individuals stands at £12,300, while trusts are able to deduct half that amount (£6,150).
When do you pay capital gains tax on property in the UK?
As we discovered in our article on the subject, the question of when CGT is payable can be interpreted in different ways. On top of this, there are different rules for different circumstances. To get the full breakdown, you can check out the post here.
So, is it possible to avoid capital gains tax on UK property sales?
The answer to this question is an unequivocal yes, you can avoid paying capital gains tax, but not always…and not by everyone.
For example, you do not have to pay CGT if you’re selling your primary residence (your main home/only home), but there’s still criteria to be met in order to be eligible:
- No part of your home has been used exclusively as business premises
- Your home doesn’t have land exceeding 5,000 square metres (including additional buildings)
- You’ve never sublet part of the property (excluding a single lodger)
- You didn’t purchase the property with the sole intention of making a gain
- You do not have another property that could be seen as being your main home
The above, however, is more of an entitlement than avoidance, and it even has a name: Private Residence Relief. If you’re looking to truly avoid paying capital gains tax when it is in fact due to be paid, you’re out of luck.
Ways to reduce your capital gains tax when selling property
There are, however, a few things you may be able to do to reduce the amount you have to pay without upsetting the taxman and falling foul of the law. Below are some examples of ways in which you may be able to do just that:
Make it your main residence
If you are in the fortunate position of owning more than one property, make sure the one you are looking to sell is nominated as your primary residence well in advance. This, however, is not a straightforward process, so it should only be undertaken with professional advice.
Claim for associated costs
Some costs may be deductible from your final CGT bill, so don’t miss out on any you may be eligible for. Estate agent and solicitors’ fees can be deducted, as can any stamp duty paid when purchasing the property. Even certain home improvements can be included, so speak to your financial advisor to ensure you’re claiming everything you are entitled to.
Make use of all allowances available to you
For those selling as a married couple (or in a civil partnership), it’s important to remember that the Annual Exemption Amount applies to individuals not the asset, so you can double what you claim by sharing ownership of the property and making use of an inter-spouse exemption.
Be aware of your tax rates
Again, this only applies to couples, but if one of you is a basic rate taxpayer and the other falls into the high-rate band, you could make a considerable saving by transferring the home into the lower-rate person’s name. As with other suggestions mentioned here, this isn’t something you should attempt to do without professional advice, but it should be considered.
Delay where necessary
Your Annual Exemption Amount is, as its name suggests, a yearly allowance. If you find yourself looking to sell in a year where you’ve already used part of your allowance elsewhere, it may be worth thinking about holding off until you have the full amount available to you once again.
So there you have it, avoiding capital gains tax when selling UK property is possible, but most will automatically be entitled to the biggest savings anyway via Private Residence Relief. For those looking to reduce what they might be liable for should PRR not apply, you really need to seek out a professional advisor for further guidance.
If you’re looking to sell property in or around London, we can help. Petty Son and Prestwich have been part of the capital’s property market since 1908, so our knowledge of what works and what doesn’t is second to none. Give our friendly sales team a call today to find out exactly how we can assist you and make your move as smooth as possible.
As with all of our posts here on Petty’s blog, this article was written for informational purposes only and does not constitute tax advice or guidance.