How to Avoid Paying Capital Gains Tax on Property in the UK: A Comprehensive Guide

Understanding Capital Gains Tax (CGT) on Property

Capital Gains Tax (CGT) is a tax levied on the profit you make when you sell an asset that has increased in value. In the context of property, CGT applies to the gain you make when you sell a property that is not your primary residence.

Exemption: Private Residence Relief

The UK government offers a tax relief called Private Residence Relief (PRR), which exempts you from paying CGT on the sale of your primary residence. To qualify for PRR, you must meet the following criteria:

  • You must have owned and occupied the property as your main home for the entire period of ownership.
  • You must not have let out any part of the property (except for having a lodger).
  • You must not have used any part of the property exclusively for business purposes (occasional use as an office does not count).
  • The grounds, including all buildings, must be less than 5,000 square meters (just over an acre) in total.
  • You must not have purchased the property solely to make a gain.

If you meet all these criteria, you will automatically receive PRR and will not have to pay CGT on the sale of your home.

Avoiding CGT on Inherited Property

If you inherit a property, you may be able to avoid CGT by selling it during probate. The deceased’s estate does not have to pay CGT on any property or assets not sold before they passed away. However, if the value of the property increases after the person dies, you may have to pay CGT when it is sold during probate. The CGT is calculated based on the increase in value after the person passed away, not the difference between the initial purchase price and the sale price.

Avoiding CGT on Foreign Property

If you are a UK resident and own a property abroad, you can avoid CGT by declaring it as your primary residence. You must inform the government of your intention to use the foreign property as your primary residence within two years of purchasing it. However, if you sell both your foreign property and your UK property in the same year, you may be liable to pay CGT.

Additional Considerations

  • Married Couples and Civil Partners: Only one property can be designated as the main home for married couples and civil partners at any given time.
  • Property Not Used as a Home: If you sell a property that is not your home, or if you live abroad, the rules for CGT may differ.
  • Tax Threshold: You may not have to pay CGT if the gain you make on the sale of your property is below the annual exempt amount, which is currently £12,300 for individuals and £6,150 for trusts.

Understanding the rules and exemptions surrounding CGT on property can help you minimize your tax liability when selling your home. By carefully considering the criteria for Private Residence Relief and exploring other strategies, such as selling inherited property during probate or declaring foreign property as your primary residence, you can potentially avoid paying CGT altogether.

Guide to Avoiding Capital Gains Tax in the UK


How long do you have to keep a property to avoid Capital Gains Tax in UK?

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.

What is the loophole of Capital Gains Tax?

A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.

Is there a way to avoid Capital Gains Tax on the selling of a house?

Is there a way to avoid capital gains tax on the selling of a house? You will avoid capital gains tax if your profit on the sale is less than $250,000 (for single filers) or $500,000 (if you’re married and filing jointly), provided it has been your primary residence for at least two of the past five years.

What is the six year rule for Capital Gains Tax?

What is the CGT Six-Year Rule? The capital gains tax property six-year rule allows you to use your property investment as if it was your principal place of residence for up to six years whilst you rent it out.

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