How to Sell Your Home Without Paying Capital Gains Tax: What Homeowners Need to Know

It is a common misconception that the sale of a property, particularly where it is the only one owned, is automatically exempt from Capital Gains Tax (CGT) However, CGT liabilities can arise in various circumstances, especially where the property’s use has changed during the period of ownership or where it has not been exclusively used as a main residence.

This article outlines the principal reliefs available, highlights common scenarios where CGT exposure may occur, and discusses essential planning strategies. Whether disposing of a primary home, a buy-to-let property, or a second home, property owners should be aware of the tax implications in order to effectively mitigate potential CGT liabilities.

The Role of Private Residence Relief (PRR)

Private Residence Relief PRR is the primary exemption that protects homeowners from CGT when selling their main home, but it is subject to strict conditions:

• Only one main residence qualifies at any one time (Married couples and civil partners are treated as having one residence between them).
• Full relief only applies if the property has been your main home for the entire period of ownership.
• Partial relief may be granted if you lived in the property for only part of the ownership period.

Final 9-Month Exemption

HMRC allows you to claim relief for the final nine months of ownership, even if you were not living in the property during that time, provided it was previously your main home. This grace period was reduced from 18 months in 2020.

CGT Implications of Letting Out Your Home

Letting out a property that was once your main residence can significantly affect your eligibility for CGT reliefs.

Letting Relief

Letting Relief is now highly restricted. As of April 2020, it is only available if the owner and tenant occupy the property at the same time. The relief is capped at the lowest of:

• The amount of PRR available
• £40,000
• The gain attributable to the letting period

This means most landlords who move out and let their entire property will not benefit from Letting Relief.

Letting Your Only Property

Even if it is your only property, letting it out can compromise your CGT position. Key issues include:

1. Loss of Full Private Residence Relief
   Once the property is let, it is no longer your main residence for CGT purposes.
2. Restricted Letting Relief
   Relief now only applies where there is shared occupancy with the tenant.
3. Reduced Final Period Exemption
   The exempt period has been reduced from 36 months to 9 months.

Case Study: Part-Let Property

Suppose you bought a home in 2015, lived in it until 2020, and then let it out until 2025:

• You qualify for PRR on the 5 years of residence.
• You also qualify for the final 9-month exemption.
• The remaining 3 years and 3 months are potentially taxable.
• The capital gain will be apportioned across the full period of ownership, and tax may be payable on the non-exempt portion.

Common Misunderstandings

A widespread myth is that owning only one property exempts you from CGT. In reality, CGT is based on how the property was used, not how many properties you own. If the property generated rental income or was otherwise not used as your main home, CGT may still apply.

Other Situations That May Limit CGT Relief

1. Working or Living Abroad Temporarily

Periods spent abroad may not qualify for PRR unless specific criteria are met, such as being required to work overseas and intending to return to the property.

2. Second Homes or Multiple Properties

If you own more than one home, you must nominate which is your main residence within two years. Without a nomination, HMRC will make a factual determination.

3. Using Part of Your Home for Business

Exclusive business use of any part of your home may lead to partial CGT liability on that portion. Mixed-use generally retains full PRR.

4. Delays in Moving in After Purchase

If you delay occupation after purchase (e.g., due to renovations or initial letting), PRR may not apply unless covered by a 12-month grace period (or longer in special cases).

Calculating Capital Gains Tax (CGT)

How to calculate CGT on a residential property:

Gain = Sale Price – Purchase Price – Allowable Costs

• Allowable costs include legal fees and capital improvement works (general repairs do not qualify, a capital improvement example would be an extension or a conservatory).

For the 2024/25 tax year, each individual is entitled to an annual CGT exemption of £3,000. This amount is deducted from the gain before calculating how much tax is due. If two individuals own the property jointly, each can apply their exemption, potentially shielding £6,000 of the gain from tax.

CGT is charged at different band rates depending on the total sum of your income and gain combined.

• 18% (basic rate) on the capital gains, totalling between £0-£37,700
• 24% (higher rate) on gains totalling above £37,700

To illustrate how Capital Gains Tax is calculated, let’s consider an individual with an annual income of £30,000 who makes a capital gain of £60,000 from the sale of a residential property. After applying the annual CGT exemption of £3,000 for the 2024/25 tax year, the chargeable gain is reduced to £57,000.

Although the individual’s income is not subject to CGT, it is still taken into account when determining which Capital Gains Tax rate applies. This is because CGT rates are banded based on the combined total of an individual’s income and their chargeable gain. In this case, the total of £30,000 (income) and £57,000 (gain) equals £87,000, which is used solely to identify how much of the gain falls into the basic rate band and how much is taxed at the higher rate.

Only the gain itself is taxed, not the income, the income simply dictates how the gain is split across the 18% and 24% CGT bands.

Since the basic rate band for CGT purposes extends up to £37,700, and £30,000 of this is already occupied by the individual’s income, only £7,700 of the gain falls within the basic rate band. This portion is taxed at 18%, resulting in a tax charge of £1,386. The remaining £49,300 of the gain (i.e. £57,000 – £7,700) exceeds the basic rate threshold and is therefore taxed at the higher rate of 24%, amounting to £11,832.

Adding both parts together, the total CGT payable in this case is £1,386 + £11,832 = £13,218

Reporting and Payment Deadlines

CGT must be reported and paid within 60 days of completion using HMRC’s online UK Property Reporting Service. Late submissions may incur interest and penalties.

How to Prepare and Minimise Exposure

• Maintain detailed records of occupancy, rental periods, and improvements
• Engage a tax advisor well before selling
• Consider main residence nominations if owning multiple homes
• Avoid exclusive business use of any part of your home if possible

Conclusion

Capital Gains Tax can be an unexpected burden for homeowners who assume that selling a former or only home is always tax-free. With the tightening of PRR rules and reduced availability of Letting Relief, strategic tax planning is essential. By understanding how different scenarios impact your CGT liability and seeking early professional guidance, you can minimise exposure and make informed decisions when selling your property.

The Jonathan Lea Network can support you throughout this process with expert legal and tax planning services, ensuring your transaction is handled efficiently and with maximum tax efficiency.

How The Jonathan Lea Network Can Help

At The Jonathan Lea Network, our experienced solicitors and tax advisors provide tailored guidance to help homeowners navigate the complexities of CGT. Whether you’re letting out your property, managing multiple residences, or planning a sale after years abroad, our team can:

• Advise on eligibility and optimisation of Private Residence Relief PRR
• Assist with timing and structuring of property disposals to minimise tax
• Support property transfers between spouses or into trusts in a tax-efficient way
• Help prepare accurate records and valuations to strengthen your HMRC position
• Liaise with tax advisors and accountants to ensure coordinated financial planning

Our goal is to help you preserve more of your gain and avoid the pitfalls that result in unexpected tax liabilities.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.