How you avoid Capital Gains Tax

You may be interested to know what your tax position is going to be when you sell your property. The basic rule is that if you buy a property at one price and sell it later at a higher price you are going to be liable to capital gains tax - CGT - on the increase in value. The big exemption is that you do not have to pay capital gains tax on your principal private residence.

To get the full exemption from CGT, you have to live at the property from when you buy it to when you sell it. If there is a period when you live somewhere else, that may be excluded. Assume you own the property for 10 years but you live somewhere else for 5 years, the Inland Revenue will give you an exemption on half of the relevant increase. They only look at the start and end figures and assume the increase in value has been in a straight line. You can't take the approach that most of the gain was in the five years you lived there and the market was flat in the years you didn't live there.

You don't get hurt by all periods of absence. Your absence during the last three years before you sell does not count against you. If there is an overlap while you own the new property and have not yet got rid of your former home, the Inland Revenue will allow you one year of overlap during which you get exemption from CGT on the new and the old homes. (In fact, if you can show the overlap continued for reasons beyond your control, they will even extend that for another year). Absences because you are working abroad (as an employee, not as a self-employed person) and absences for up to four years in total while you have to live somewhere else in the UK because of the requirements of your job are also not counted against you. To cap all of this, other absences not exceeding three years are also allowed.

If you have two homes - a flat in town and a cottage in the country - only one of them can be your principal private residence at any one time. But generally you get the right to decide which of them you elect for that purpose and that means you can choose the one you expect to go up most in value.

If you do have to pay CGT on the sale of a property (possibly because it is your second home or one you bought but didn’t live in) then you can still take advantage of the annual exemption of the first few thousand pounds tax-free (on all gains in the year). You also don't have to pay tax on any increase in property values due to inflation. You're only going to be paying tax on the amount by which the increase in value outstrips inflation.

If you live in a house surrounded by acres of land, then even if the house is your principal private residence you don't get relief from CGT on all the land. You are entitled to relief from CGT on up to 0.5 hectares of land (including the site of the house). You then have to pay CGT on the gains attributable to the rest of the land. If you can convince the Revenue that a larger area is integral to the house, they may extend the 0.5 hectare limit.

This is a very general explanation and since this is a very technical area, there may be some reason why this won't apply to you or your property, so you must always get proper tax advice on your individual circumstances if you want to know your actual position.