If you’re selling a home you’re likely wondering ‘can I avoid paying capital gains’ or ‘how to avoid paying capital gains tax when selling a house’.

Capital gains is defined by gov.uk as ‘a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value…It’s the gain you make that’s taxed, not the amount of money you receive.’

Gov.uk provides an example ‘you bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).’

What is capital gains tax?

So, capital gains tax is a tax that is paid when significant profit is made on items like second houses, antiques, shares, and more.

You only pay capital gains if you’ve made significant profit within a tax year.

The government sets the figure that can be made per year and you can work out the profit by calculating the difference between what you bought an item for and what you sold it for. The difference is the profit.

How to avoid paying capital gains tax when selling a house

Some people can avoid paying capital gains on their property, but there is a criteria. In order to avoid paying capital gains, you must meet the criteria below:

  • You must have one home that you’ve lived in as your main home for the entire time you’ve owned it
  • You must not let part of it out (lodgers are okay!)
  • You have not used part of it for business only
  • The grounds, including all buildings, are less than 5,000 square metres in total
  • You did not buy it just to make a gain

So, if you meet the criteria above capital gains needn’t be on your mind. If, however you have inherited a property, capital gains may be something you need to think about.

How much is capital gains tax?

As per the formula supplied above, by gov.uk the capital gains tax is the profit made when you’ve calculated sale price minus price paid.

If you’re looking into capital gains tax in relation to a property you can also subtract any fees from the capital gains tax, so that’s estate agent fees, solicitor fees, maintenance fees or fees in relation to home improvements.  You can then work out the tax rate using the current capital gains tax rate.

According to Money Saving Expert, for 20/21 that’s:

  • An annual exception of £12,300 for individuals
  • The standard CGT rate is 18% on residential property and 10% on other assets
  • For the higher CGT rate it’s 28% on residential property, 20% on other assets.