How Can I Reduce My Capital Gains Tax When Selling a Property

Introduction

Capital Gains Tax is charged when you sell or dispose of an asset, such as a second home, buy-to-let property, or piece of land, for more than you paid for it.

Your capital gain is the difference between the sale price and the amount you originally paid, after deducting any allowable costs and reliefs. CGT applies only to the profit, not the total sale value.

Understanding how the tax works before you sell can help you make informed decisions and reduce your liability.

How Capital Gains Tax is calculated on property

When you sell a property, your taxable gain is calculated as:

Sale price (Purchase price + Allowable costs + Reliefs) = Taxable gain

Allowable costs can include:

Solicitor and estate agent fees.

Stamp Duty Land Tax paid when you bought the property.

Costs of improvements such as extensions, new kitchens, or structural work.

You cannot deduct costs of maintenance, repairs, or mortgage interest.

After deducting allowable costs, you can also use your annual CGT allowance, which is £3,000 for the 2024 25 tax year.

CGT rates on property are:

18 percent for basic rate taxpayers.

24 percent for higher and additional rate taxpayers.

Your total income and the size of your gain determine which rate applies.

1. Claim Private Residence Relief

If the property you are selling was your main home for part or all of the time you owned it, you may qualify for Private Residence Relief (PRR).

This relief exempts the portion of the gain that relates to the time you lived in the property as your main residence. You also get relief for the final nine months of ownership, even if you were not living there during that period.

Example

You owned a property for 10 years and lived in it for 6 years before renting it out. You will receive PRR for 6 years plus the final 9 months, meaning only the remaining 3 years and 3 months are taxable.

If the property was once your main home, this relief can significantly reduce your taxable gain.

2. Use Letting Relief (in limited cases)

Letting Relief can further reduce CGT if you rented out a property that was once your main residence.

Since 2020, Letting Relief only applies if you lived in the property at the same time as your tenants, such as when you rented out a spare room.

In that case, you can claim up to £40,000 in relief (£80,000 for a couple).

Although this relief is now limited, it can still benefit homeowners who shared their property with tenants.

3. Deduct all allowable costs

Make sure you claim every legitimate cost associated with buying, improving, and selling the property.

Typical allowable costs include:

Legal fees for buying and selling.

Stamp Duty and survey costs.

Advertising and estate agent fees.

Building improvements, such as an extension, conversion, or new roof.

These costs reduce your taxable gain, so keeping receipts and invoices is essential.

4. Time your sale carefully

The timing of your sale can affect how much tax you pay. If you expect your income to be lower in a future tax year, delaying the sale could move you into a lower tax band.

You could also sell part of the property in one tax year and the rest in the next to spread the gain across two annual allowances.

If you are married or in a civil partnership, transferring part of the property to your partner before selling can double your annual CGT allowance and make use of their lower tax band.

Example

If you own a property jointly, each of you can use your £3,000 CGT allowance, giving a combined £6,000 tax-free gain. If one partner pays basic rate tax and the other pays higher rate, transferring ownership before selling can reduce the overall rate of tax paid.

5. Offset capital losses

If you have made losses on other investments, such as shares or crypto, you can offset them against your property gain to reduce your taxable amount.

You must report losses to HMRC within four years of the end of the tax year in which they occurred. Any unused losses can be carried forward indefinitely and used to offset future gains.

6. Use your spouse or civil partner’s allowances

Property transfers between spouses or civil partners are exempt from CGT. This allows you to share ownership of a property before selling, so you can:

Double your CGT allowance (£3,000 each).

Use both of your income tax bands to benefit from lower CGT rates.

This is one of the simplest and most effective ways to reduce your tax liability legally.

7. Consider reinvestment options

If you are a business owner selling a property used for trading purposes, you may qualify for Business Asset Rollover Relief or Business Asset Disposal Relief.

Business Asset Rollover Relief lets you defer paying CGT if you reinvest the proceeds into another qualifying business asset within a set period.

Business Asset Disposal Relief (previously Entrepreneurs’ Relief) allows you to pay CGT at 10 percent instead of 24 percent when selling qualifying business assets, including some commercial properties.

8. Sell through your limited company

If you operate through a limited company, selling investment properties can sometimes be more tax efficient, especially if you plan to reinvest profits into new developments.

However, company ownership has its own tax implications, including Corporation Tax on gains and potential double taxation when withdrawing funds personally. Always seek professional advice before restructuring ownership.

9. Gift to family strategically

Gifting property to family members while you are alive may reduce the size of your estate for future Inheritance Tax purposes. However, it can trigger CGT if the property has increased in value since purchase.

If you gift to your spouse or civil partner, no CGT is due, making this another way to manage tax between you.

10. Keep good records

Accurate records are the foundation of every CGT calculation. Keep copies of:

Purchase and sale contracts.

Solicitor and estate agent invoices.

Receipts for improvement works.

Mortgage statements.

These records will help you calculate your gain precisely and claim all allowable deductions. HMRC can request evidence for up to six years after a sale.

Example scenario

David sells a buy-to-let property for £350,000 that he originally bought for £200,000. He spent £20,000 on improvements and £5,000 on legal and agent fees.

His gain is £350,000 (£200,000 + £20,000 + £5,000) = £125,000.
After applying his £3,000 annual allowance, his taxable gain is £122,000.
As a higher-rate taxpayer, he pays 24 percent CGT, which equals £29,280.

If David were married and shared ownership with his spouse, they could use two allowances and pay tax at lower rates, potentially saving thousands.

Common mistakes to avoid

Forgetting to claim Private Residence Relief or allowable costs.

Misreporting repairs as improvements or vice versa.

Selling before using your spouse’s allowances.

Missing the CGT payment deadline (60 days for residential property).

Conclusion

Capital Gains Tax can significantly impact your profits when selling a property, but with careful planning, you can reduce your bill legally. Claiming available reliefs, deducting all costs, timing your sale wisely, and sharing ownership with your spouse are all effective strategies.

Keeping thorough records and seeking professional tax advice will ensure you maximise your reliefs and stay compliant with HMRC rules. Thoughtful preparation before you sell could save you thousands in tax and help you make the most of your investment.