Capital Gains Tax (CGT) Traps to Avoid in 2025
Capital Gains Tax (CGT) can be a costly surprise if you don’t plan ahead. Whether you’re selling a second home, investment property, shares, or other assets, it’s crucial to understand the potential pitfalls that could leave you paying more tax than necessary. This guide will highlight the most common CGT traps and provide strategies to navigate them effectively.
1. Overlooking the Annual Exemption
The CGT annual exemption has been drastically reduced. In 2023/24, it was £6,000, but from April 2024, it’s just £3,000. This means more people will now be liable for CGT when selling assets.
Tip: If you’re selling investments, consider staggering disposals across tax years to maximize exemptions. Spouses can also transfer assets between them tax-free before selling, potentially doubling their exemptions.
2. Misunderstanding Private Residence Relief (PRR)
If you sell your main home, you typically don’t pay CGT due to Private Residence Relief (PRR). However, PRR only applies if the property has been your main home for the entire ownership period.
Common Mistake: If you let out your home before selling or use part of it for business, a portion of the gain may become taxable.
Tip: The final 9 months of ownership always qualify for PRR, even if you’ve moved out, but beyond that, tax could apply.
3. Failing to Report Gains Within 60 Days
If you sell a UK residential property that results in a taxable gain, you must report and pay the tax within 60 days of completion.
Common Mistake: Many sellers assume they can wait until their usual tax return deadline, but this could lead to penalties and interest.
Tip: If in doubt, report the gain anyway. You can amend the return later if necessary.
4. Neglecting Inherited Properties and Trusts
When inheriting property, the base cost for CGT purposes is the market value at the date of death, not the original purchase price.
Common Mistake: If you later sell the property for more than its probate value, CGT may apply. This is especially relevant if the value was underestimated at probate.
Tip: If there is a risk of underreporting, consider obtaining a professional valuation to avoid disputes with HMRC.
5. Ignoring the ‘Main Residence Clock’
The time a property is designated as your main residence affects PRR eligibility.
Common Mistake: Moving into a property briefly before selling does not automatically qualify it for PRR.
Tip: If you own multiple homes, nominate one as your main residence within two years of acquiring the second property.
6. Falling into the Gift Relief Trap
Transferring assets to family members can trigger CGT at market value, even if no money changes hands.
Common Mistake: A parent gifting a buy-to-let property to a child may trigger an immediate CGT charge, as if they had sold it at market value.
Tip: Consider holdover relief for business assets and some gifts into trusts, which can defer the tax until the recipient sells.
7. Overlooking Business Asset Disposal Relief (BADR)
If you sell a business, you might qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), reducing CGT to 10% on the first £1 million of lifetime gains.
Common Mistake: The business must be trading, and you must have owned it for at least two years before selling. Selling too soon or having too much non-trading income (like rental income) could disqualify you.
Tip: Plan well in advance. If your business has rental income, ensure at least 80% of its activity is trading to maintain eligibility.
8. Not Accounting for Capital Losses
If you sell assets at a loss, you can offset the loss against gains in the same tax year or carry it forward to future years.
Common Mistake: Forgetting to report capital losses to HMRC, losing the opportunity to offset future CGT bills.
Tip: Even if you don’t owe tax this year, record and report all capital losses to preserve them for future use.
9. Forgetting to Use a Spouse’s Allowances
Transfers of assets between spouses or civil partners are tax-free.
Common Mistake: A higher-rate taxpayer sells shares and pays 20% CGT, while their lower-earning spouse could have paid only 10%.
Tip: Transfer assets to a spouse before selling to utilize their CGT allowance and lower tax rate.
10. Ignoring the Effect of Inflation on Gains
Unlike past years, there is no indexation allowance to adjust for inflation.
Common Mistake: Holding assets long-term without considering how inflation increases the taxable gain.
Tip: Consider tax-efficient investments like ISAs or pensions, which are CGT-free.
Final Thoughts
With CGT exemptions at historic lows, more people will find themselves caught in the tax net. However, by planning ahead and avoiding these common traps, you can minimize your CGT liability and keep more of your hard-earned gains.
Need Help? At Merranti Accounting, we provide expert tax planning to help you maximize your allowances and avoid costly mistakes. Get in touch today for tailored advice!
