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How to Avoid Capital Gains Tax in the UK?

Written by, Marija Petkova

Updated September, 19, 2022

Every time you sell assets and make a profit, you need to pay Capital Gains Tax on those profits, a complicated tax that often catches people unaware. 

Luckily there are several ways you can reduce your CGT bill. 

Read on below for 13 effective strategies on how to avoid Capital Gains Tax in the UK. 

How to Reduce Capital Gains Tax in the UK?

Bear in mind that some strategies are more effective than others. Ultimately the best way to avoid Capital Gains Tax depends on your unique financial circumstances. 

1. Make the most out of your CGT allowance

Every UK taxpayer is entitled to an annual Capital Gains Tax allowance. In the 2022/23 tax year, you can earn up to £12,300 and avoid Capital Gains Tax completely. 

However, the tax-free allowance doesn’t transfer into your new financial year, which means that you must use your CGT allowance once a year or lose it. 

2. Use your ISA allowance

ISAs are one of the most popular savings accounts in the UK, mainly because any gains you make from ISA investments are exempt from CGT. 

In 2022/23, you can invest up to £20,000 in an ISA, or £40,000 per household, i.e. including your partner or spouse. 

Investing in a Self-Invested Personal Pension (SIPP) is another way to reduce Capital Gains Tax as any profit you make is also tax-free. 

3. Gift assets to your spouse 

Avoiding Capital Gains Tax is possible if you transfer assets to your spouse or civil partner 

This also effectively brings the CGT tax-free allowance to £24,600 in a single tax year. The assets, though, must be genuinely given as a gift without any strings attached.

Keep in mind that if your spouse or partner later sells the asset, they might have to pay CGT. 

4. Offset losses against gains

Capital gains and losses made in the same financial year must be offset against each other, and since you only pay tax on net gains so you could use losses to reduce the amount you owe. You could also bring forward unused losses from the previous years, but you need to report them to the HMRC within 4 years from the end of the financial year in which you sold the asset. 

5. Reduce taxable income 

You could reduce your taxable income (which is your annual income minus Personal Allowance and Income Tax Reliefs). If you have a higher income, your CGT rate is 28% on gains from the sale of residential property and 20% on gains from the disposal of other assets

Those who fall in the basic rate Income Tax band pay 10% on your gains or 18% on residential property. 

There are a few effective strategies to help you reduce your taxable income: make salary sacrifices to pension contributions or claim credits (such as working tax credit and child tax credit). 

You might be interested in: When do you start paying tax in the UK?

6. Selling and buying the same asset 

To reduce CGT, you could sell part of the asset and then buy it back. This way, you also increase the cost of the asset, which means you will make a lower profit when buying it back and thus again pay less in CGT. Rules imply that you have to wait at least 30 days before you can buy the asset back. 

A similar tactic is selling an asset and then buying it back inside an ISA or pension fund. Also known as ‘Bed and SIPP’ or ‘Bed and ISA, reinvesting your profit like this also protects your future gains from Capital Gains Tax.  

That said, these strategies can be quite complicated, so you should consider consulting a professional beforehand.

7. Donate to charity 

One of the safest and most unselfish ways to avoid Capital Gains Tax in the UK is to make a donation to a charity. Assets you give away to charity are not subject to CGT unless you sell them and make a profit. 

8. Sell your home instead of a second property 

When it comes to avoiding Capital Gains Taxon property in the UK, your best option is to sell your primary residence, as this sale is not subject to CGT.  However, there are some conditions you need to meet to qualify for a Private Residence Relief, including one that says you have not rented the property or used it for business purposes. 

To learn more about avoiding Capital Gains Tax on property, read through this helpful guide

9. Spread your gains over two tax years

If you are fortunate enough to make a big profit from the sale of an asset, you could consider selling half at the end of the financial year (around April 5) and the other half in the following tax year. This way, you will take advantage of two years’ worth of tax-free allowances and maybe even succeed in avoiding Capital Gains Tax altogether, 

10. Invest in venture capital schemes

Another way to avoid Capital Gains Tax in the UK is investing in an EIS (Enterprise Investment Scheme). Under certain conditions, any gains you make from EIS investments can be CGT-free. 

However, an EIS is a high-risk scheme and better suited to investors with some experience. 

11. Deduct extra costs

Selling assets in the UK and property, in particular, comes with a lot of extra costs, such as solicitors’ fees and stamp duty. You can deduct these when calculating your CGT. 

12. Use business asset relief 

Giving away or selling business assets for less than they are worth in order to help the buyer is another way to avoid paying Capital Gains Tax. This is known as Gift Hold-Over Relief.
Others include 

  • Business Asset Disposal, which puts you in the 10% tax rate on qualifying assets, 
  • Business Asset Roll-Over Relief involves selling a business asset and buying a replacement and 
  • Incorporation Relief, which you may be entitled to when making a transfer from working as a sole trader into a company. 

13. Don’t pay tax twice

When a person dies, the beneficiary pays Inheritance Tax on the estate. So, it might be better if you hold on to assets later in life instead of disposing of them to avoid paying tax twice. 

What Don’t You Pay CGT On?

Some assets are not subject to Capital Gains Tax. These include but are not limited to:

  • Your main residence (provided you meet the requirements)
  • Selling your car (unless it is used for business purposes)
  • ‘Wasting assets’, i.e. items with a lifespan of 50 years
  • Donations to charity 
  • Assets that you have sold for less than £6,000
  • Assets held in an ISA or pension account 
  • Premium bonds and other UK government gilts
  • Winnings from the lottery or bets

Bottom Line 

As you can see from the list above, reducing Capital Gains Tax on property and other assets is possible. However, before you try any of the strategies, make sure you do your research and talk to a financial adviser who will inform you about which Capital Gains Tax avoidance tactic would work best for you. 

                           

Frequently Asked Questions And Their Answers

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

You can only avoid paying CGT on property when you sell your main residence in which you have lived for at least two years. Bear in mind that to claim this relief, you need to meet other conditions as well. 

How can I avoid Capital Gains Tax on a second property?

Completely avoiding CGT on a second property is not possible, although you can reduce the Capital Gains Tax bill by using the PRR relief. 

How can I legally pay less Capital Gains Tax?

There are several ways to reduce your tax bill legally, such as investing in an ISA or SIPP or making a donation to a charity or your spouse/partner. Still, the best way when it comes to how to avoid Capital Gains Tax in the UK is to use up all your CGT allowance for each tax year or possibly sell your assets across two tax years and avail of two tax-free allowances.

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.