You and your spouse own a second home which your daughter uses while at university. You’re planning to sell it after her course ends this summer. As its value has risen you’re expecting a hefty capital gains tax bill. How might you reduce it?
Rising tax on gains
As you’ll be aware, if you sell a property for more than you paid for it the difference is liable to capital gains tax (CGT). This can result in a large tax bill especially in light of the recent hikes in the CGT rates. The good news is that there are a few tax breaks which you can use to mitigate the tax bill.
Trap. You must report and pay the CGT within 60 days of the sale of residential property or risk a penalty.
CGT rates
In 2025/26, you’ll be liable to 18% CGT when your combined income and gains fall in the basic rate band. Anything over this is charged at 24%. Where the gain takes you into the higher rate, you’ll pay a mixed rate, i.e. 18% and 24%. The difference in rates can be an important factor in reducing the CGT bill on the sale of assets, but first we need to consider what deductions are allowed before calculating CGT.
First deduction – capital losses
Before your CGT exemption is deducted from your gains, any capital losses you’ve made in the same year are deducted, plus any capital losses you made in earlier tax years which haven’t been used against gains.
Second deduction – annual exemption
The first £3,000 of any capital gain you make in 2025/26 is exempt. This allowance is per person and renews every tax year. Therefore, while it’s nothing to shout about, if the asset that you’re selling is owned jointly with your spouse or civil partner, the exempt amount is £6,000.
Tip. Check if you need to change the proportion of the property you and your spouse/civil partner each own to ensure annual exemptions and capital losses are used fully, and that the tax rate bands are optimised. Special rules are helpful in tax planning here.
Example. Tom and Barbara are married. Tom bought the next door property for £150,000 in 2010 and has since let it. He transfers a 30% interest in March 2025 to Barbara when it is worth £250,000. The tax rules deem Tom to have sold the 30% interest for £45,000 (£150,000 x 30%). This means Tom makes neither a gain nor a loss for CGT purposes.
Trap. Beware if the property is mortgaged, as a stamp duty land tax (SDLT) charge can arise if there is a transfer of the loan from one spouse/civil partner to the other.
In practice
If you want to split an asset it is advisable to allow at least a few months before the property is sold to a third party. For property, a deed of trust will be required and the new ownership must be registered.
Before the sale a married couple or civil partners can change the proportion of the property they each own. This means they can double up on annual exemptions, reduce tax rates and utilise available capital losses in order to minimise the tax payable on gains from the property.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.