Index of the Article:
Understanding Capital Gains Tax on Commercial Property Sales
Key Strategies to Avoid or Reduce CGT on Commercial Property
Advanced Property Tax Planning: Legal Ways to Reduce or Avoid Capital Gains Tax (CGT) in the UK
How to Structure Your Property Disposal for Maximum Tax Efficiency and Avoid Common Pitfalls
Summary of Key Points on Avoiding Capital Gains Tax on Commercial Property
Understanding Capital Gains Tax on Commercial Property Sales
Capital Gains Tax (CGT) is a crucial consideration when selling commercial property in the UK. For business owners, investors, and landlords, the tax implications can be significant, reducing the profits from a sale. However, there are legal ways to reduce or even avoid paying CGT if you take the right steps in advance. This guide explores various strategies that can help UK taxpayers minimize their CGT liability when selling commercial properties, with updated information as of January 2025.
Understanding Capital Gains Tax on Commercial Property Sales
When you sell a commercial property in the UK, the profit you make (known as a capital gain) is subject to Capital Gains Tax. Unlike residential properties, commercial property sales involve different rates, allowances, and exemptions. It’s crucial to know how CGT works and the most effective strategies to reduce it.
Let’s start with the basics of CGT in the 2024/2025 tax year.
1. Current CGT Rates for Commercial Property (2024/2025)
In the 2024/2025 tax year, CGT rates for commercial property sales are:
Taxpayer Status | CGT Rate on Commercial Property |
Basic Rate Taxpayer | 10% |
Higher/Additional Rate | 20% |
These rates are notably lower than the rates applied to residential properties, which can reach up to 28%. However, commercial property sales still involve considerable tax liability.
2. Annual CGT Exemption (2024/2025)
Every individual in the UK is entitled to an annual CGT allowance, which reduces the taxable gain. For the 2024/2025 tax year, the annual allowance is:
£6,000 per individual (reduced from £12,300 in the previous years).
If you own a commercial property with a partner or spouse, you can combine both allowances, which increases your tax-free allowance to £12,000. This is a quick and legal way to reduce your CGT liability.
For example:
🔹 Scenario: You and your spouse sell a commercial property, making a £50,000 profit. After deducting the combined £12,000 allowance, you’ll pay CGT only on £38,000.
3. How to Calculate Capital Gains on Commercial Property
Understanding how to calculate your capital gain is crucial. Here’s a breakdown:
Steps to Calculate CGT on Commercial Property:
Determine Sale Price: The amount you sell the property for.
Deduct Allowable Costs: Include purchase price, legal fees, stamp duty, renovation costs, etc.
Apply Tax-Free Allowance: Use your personal annual CGT exemption.
Apply CGT Rate: Depending on your tax bracket.
Example Calculation:
Property Sale Price | £300,000 |
Purchase Price (incl. fees) | £200,000 |
Capital Gain | £100,000 |
Annual CGT Allowance | £6,000 |
Taxable Gain | £94,000 |
For a higher-rate taxpayer, the CGT would be calculated as:
20% of £94,000 = £18,800 in CGT liability.
4. Rollover Relief for Business Owners
If you sell a commercial property that has been used for business purposes and reinvest the proceeds into another qualifying business asset, you may qualify for rollover relief. This allows you to defer your CGT liability.
Conditions for Rollover Relief:
The property must be a business asset.
The proceeds must be reinvested within 3 years into another business asset.
The new asset must be used for trade purposes.
Example:
🔹 Scenario: Sarah sells her warehouse (used for her logistics business) for £500,000. She reinvests the entire amount into a new warehouse within a year. By doing this, she defers her CGT liability, meaning she doesn’t have to pay CGT immediately. Instead, the gain is “rolled over” to the new property.
5. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
Business Asset Disposal Relief (BADR) offers a reduced CGT rate of 10% on qualifying business assets, up to a lifetime limit of £1 million. This relief is ideal for business owners selling commercial properties used in their trade.
Who Qualifies for BADR?
You must be a sole trader, partner, or company director.
You must have owned the property for at least 2 years.
The property must have been used for business purposes.
6. Gifting Property to Family Members
Another legal way to reduce or avoid CGT is by gifting property to family members. However, it’s essential to understand the implications of gift relief and inheritance tax (IHT).
How Gift Relief Works:
You can gift a commercial property to a family member without triggering an immediate CGT liability.
The recipient will inherit your original base cost, meaning the gain is deferred until they sell the property.
Example:
🔹 Scenario: John owns a shop that has increased in value by £100,000. Instead of selling, he gifts it to his daughter. No CGT is due at the time of the gift. However, if his daughter sells the shop later, she will be responsible for the CGT based on the original purchase price.
7. Using Enterprise Investment Schemes (EIS)
Investing the proceeds from a commercial property sale into an Enterprise Investment Scheme (EIS) can help defer CGT. EIS offers generous tax reliefs to investors in high-risk companies.
Key Benefits of EIS:
Deferral Relief: You can defer CGT by investing in qualifying EIS companies.
Income Tax Relief: Up to 30% income tax relief on investments up to £1 million per year.
Tax-Free Gains: If you hold the EIS shares for at least 3 years, any profits are exempt from CGT.
8. Claiming Private Residence Relief (PRR)
If a portion of your commercial property is used as your main residence, you may be eligible for Private Residence Relief. This can significantly reduce your CGT liability on that portion of the property.
Example:
🔹 Scenario: Paul runs a café and lives in the flat above. He sells the building for £400,000. He may qualify for PRR on the residential portion of the building, reducing his overall CGT liability.
Summary of Key Strategies:
Strategy | Key Benefit |
Rollover Relief | Defers CGT by reinvesting in business assets. |
Business Asset Disposal Relief | Reduces CGT rate to 10% for business owners. |
Gifting to Family | Defers CGT liability until the recipient sells. |
Enterprise Investment Scheme | Defers CGT and offers other tax reliefs. |
Private Residence Relief | Reduces CGT on properties partly used as a home. |
Key Strategies to Avoid or Reduce CGT on Commercial Property
Now we’ll dive deeper into advanced tax planning strategies, trust structures, and the impact of recent policy changes, including updates from the Autumn 2024 Budget. We'll also cover how charitable donations and inheritance tax planning can help reduce your CGT liability.
Advanced Tax Planning Strategies to Reduce CGT
Once you’ve understood the basic strategies for minimizing CGT, you can explore more advanced planning techniques. These are particularly useful for individuals or businesses with significant commercial property portfolios.
1. Using Trusts to Minimize CGT Liability
One of the most effective ways to reduce CGT liability on commercial property is through the use of trust structures. Trusts are legal entities that hold assets (such as property) on behalf of beneficiaries.
How Trusts Can Help Avoid CGT:
Deferral of CGT: When a property is transferred into a trust, CGT liability can be deferred until the trust sells the property.
Discretionary Trusts: These allow you to spread the CGT liability across multiple beneficiaries, each using their individual CGT allowance.
Bare Trusts: The beneficiaries are treated as direct owners of the property, meaning they can use their personal allowances to reduce CGT.
Example of a Trust in Action:
🔹 Scenario: David owns a commercial property worth £1 million. Instead of selling it outright and facing a large CGT bill, he places the property in a discretionary trust. The trust distributes the proceeds to his children over several years, allowing each beneficiary to use their £6,000 annual allowance to reduce the overall CGT liability.
Trust Type | CGT Benefit |
Discretionary Trust | Spreads CGT liability across beneficiaries. |
Bare Trust | Beneficiaries use their personal allowances. |
2. Incorporating Your Commercial Property
Another way to reduce CGT on commercial property is by incorporating your property portfolio into a limited company. This is known as incorporation relief.
Benefits of Incorporation:
CGT Deferral: Incorporation allows you to defer CGT until you sell the shares in the company, rather than paying it immediately.
Lower Corporation Tax Rates: Once the property is in a company structure, future gains are taxed at the corporation tax rate (currently 25% in 2025), which is often lower than personal CGT rates.
How to Qualify for Incorporation Relief:
The property portfolio must be run as a business, not just as passive investments.
You must transfer all assets and liabilities to the company.
Example:
🔹 Scenario: Michael owns a commercial property portfolio valued at £2 million. By transferring the portfolio into a limited company, he avoids paying CGT immediately. Instead, the gain is deferred until he sells his company shares.
3. Utilizing Investors’ Relief for Long-Term Investments
Investors’ Relief is a relatively lesser-known tax relief that applies to long-term investments in unlisted trading companies. It offers a 10% CGT rate on qualifying gains, up to £10 million.
Criteria for Investors’ Relief:
You must have held shares in the company for at least three years.
The company must be an unlisted trading company.
Example:
🔹 Scenario: Alice invests in an unlisted commercial property development company. After five years, she sells her shares and makes a significant profit. Instead of paying the standard 20% CGT rate, she qualifies for Investors’ Relief and pays only 10%.
4. Using Holdover Relief for Gifts
If you want to gift your commercial property to someone else without triggering an immediate CGT liability, holdover relief is a valuable option. This relief defers the CGT until the recipient sells the property.
Conditions for Holdover Relief:
The property must be a business asset.
The gift must be made to family members or trustees.
Example:
🔹 Scenario: Tom owns a warehouse used in his family’s business. He decides to gift it to his daughter. With holdover relief, no CGT is due at the time of the gift. The CGT liability is deferred until his daughter sells the property.
Recent Policy Updates: Autumn 2024 Budget
The Autumn 2024 Budget introduced several updates that affect CGT on commercial property. Here are the key takeaways:
1. Reduction in Annual Allowance
The annual CGT exemption was reduced to £6,000 in the 2024/2025 tax year, down from £12,300 in previous years.
Action Point: Taxpayers should maximize their exemptions by distributing property sales across different tax years or using trust structures to spread gains.
2. Changes to Business Asset Disposal Relief (BADR)
The lifetime limit for BADR remains at £1 million, but the qualifying criteria have been tightened.
Action Point: Ensure your business assets meet the updated criteria for active trading to qualify for the relief.
3. Rollover Relief Adjustments
The government clarified the timeline for reinvestment in business assets to three years from the date of sale.
Action Point: Plan your reinvestment strategy to ensure you qualify for rollover relief within the updated timeframe.
Charitable Donations to Reduce CGT
One often-overlooked way to reduce CGT is through charitable donations. If you donate your commercial property (or a portion of it) to a registered charity, you may be able to eliminate your CGT liability entirely.
Benefits of Charitable Donations:
No CGT on donated property.
Income tax relief on the market value of the property.
Example:
🔹 Scenario: Emma owns a retail property worth £500,000. Instead of selling it, she donates the property to a charity. As a result, she pays no CGT on the donation and also qualifies for income tax relief.
Summary of Advanced Tax Strategies:
Strategy | Key Benefit |
Trust Structures | Defers or spreads CGT liability. |
Incorporation Relief | Defers CGT by transferring to a company. |
Investors’ Relief | Reduces CGT to 10% on long-term gains. |
Holdover Relief | Defers CGT when gifting property. |
Charitable Donations | N |
Advanced Property Tax Planning: Legal Ways to Reduce or Avoid Capital Gains Tax (CGT) in the UK
In this part, we’ll shift our focus to property disposal strategies, the interaction between CGT and Inheritance Tax (IHT), and how to structure your sale to maximize tax efficiency.
These strategies are essential for property investors, business owners, and landlords looking to legally avoid hefty tax bills while complying with HMRC regulations.
Understanding the Overlap Between CGT and Inheritance Tax (IHT)
When planning the sale or transfer of commercial property, it’s important to understand the interaction between Capital Gains Tax (CGT) and Inheritance Tax (IHT). These two taxes often overlap, particularly in cases where property is being passed down to the next generation.
Let’s explore how you can minimize your tax liability across both taxes.
1. The Double Tax Trap: CGT vs. IHT
The UK tax system creates a potential double tax trap for property owners. Here’s how it works:
Capital Gains Tax (CGT): Applies when you sell or transfer a commercial property during your lifetime.
Inheritance Tax (IHT): Applies when you pass away and your property forms part of your estate.
In some cases, families may face both taxes if careful planning isn’t undertaken. The key to avoiding this trap is understanding which tax applies in different scenarios and structuring your property ownership accordingly.
2. The Step-Up in Base Cost on Death (IHT Advantage)
One of the most effective ways to avoid paying CGT is through the step-up in base cost that occurs when property is inherited after the owner’s death. Here’s how it works:
How the Step-Up Works:
When a property is inherited, the base cost for CGT purposes is adjusted to the property’s market value at the date of death.
This effectively wipes out any capital gain that occurred during the deceased’s lifetime.
This strategy allows heirs to avoid paying CGT on gains that accrued during the original owner’s lifetime. However, the property will still be subject to Inheritance Tax (IHT) if the estate exceeds the £325,000 nil-rate band.
Example:
🔹 Scenario: David purchased a commercial property for £300,000. At the time of his death, the property is worth £600,000. If David had sold the property during his lifetime, he would have faced CGT on the £300,000 gain. However, since the property was inherited, the base cost for CGT purposes is reset to £600,000, meaning his heirs won’t face any CGT on that gain.
3. Strategies to Reduce IHT and CGT Simultaneously
To minimize both IHT and CGT, property owners can consider the following strategies:
Strategy | CGT Benefit | IHT Benefit |
Gifting Property Early | Defers CGT through holdover relief | Reduces estate value for IHT purposes |
Using Trusts | Spreads CGT liability over beneficiaries | Removes property from estate after 7 years |
Charitable Donations | Eliminates CGT liability | Reduces IHT liability by lowering estate value |
4. Timing the Sale to Maximize Exemptions
The timing of your sale can have a huge impact on your CGT liability. By carefully planning the sale to coincide with tax-free allowances and annual exemptions, you can reduce your overall tax bill.
Tips to Time Your Sale:
Split Sales Across Tax Years: If you’re selling multiple properties, consider splitting the sales across different tax years to maximize your annual CGT allowance.
Sell During a Low-Income Year: Your CGT rate is based on your income tax band. If possible, sell in a year when your income is lower to qualify for the 10% CGT rate instead of 20%.
Example:
🔹 Scenario: Mike is a higher-rate taxpayer. He plans to sell two commercial properties, with a combined gain of £90,000. Instead of selling both in the same tax year, he sells one property in 2024/2025 and the other in 2025/2026, utilizing his £6,000 annual exemption in both years. This reduces his taxable gain and CGT liability.
5. Using Deferred Consideration and Instalment Sales
Another way to reduce your immediate CGT liability is through deferred consideration or instalment sales.
What Is Deferred Consideration?
Deferred consideration refers to agreeing to receive payment in instalments over a period of time, rather than receiving the full payment upfront. This method can spread your CGT liability across multiple tax years.
Benefits:
Reduces immediate CGT liability by spreading the gain over several years.
Allows you to utilize your annual CGT exemption each year.
Example:
🔹 Scenario: Sophie sells her commercial property for £500,000, agreeing to receive £100,000 per year for five years. This allows her to spread the gain and reduce her CGT liability by using her annual exemption each year.
6. Offset Capital Losses to Reduce CGT
If you’ve made capital losses on other investments (such as stocks or other properties), you can offset these losses against your capital gains to reduce your CGT liability.
Key Rules for Capital Losses:
Losses must be reported to HMRC within four years of the tax year in which they occur.
Unused losses can be carried forward to offset future gains.
Example:
🔹 Scenario: James sells a commercial property, making a £70,000 gain. He also has £20,000 in unused capital losses from previous investments. He offsets these losses, reducing his taxable gain to £50,000.
7. Selling the Property Through a Limited Company
If you already own a commercial property through a limited company, you can reduce your CGT liability by selling the shares in the company rather than the property itself.
Benefits of Selling Shares Instead of Property:
Lower Tax Rate: Share sales are subject to entrepreneurs’ relief or investors’ relief, reducing the CGT rate to 10%.
Avoid Stamp Duty: The buyer may avoid paying Stamp Duty Land Tax (SDLT) on the property.
Summary of Property Disposal Strategies:
Strategy | Key Benefit |
Timing the Sale | Maximize annual CGT exemptions |
Deferred Consideration | Spread CGT liability over multiple years |
Offset Capital Losses | Reduce taxable gains |
Selling Through a Company | Lower CGT rate and avoid SDLT |
Tax-Efficient Strategies to Gift, Sell, or Transfer Commercial Property Without Paying Capital Gains Tax
Let's now focus on gifting commercial property tax-free, international tax considerations, and common pitfalls to avoid when minimizing your CGT liability.
These strategies are crucial for individuals who plan to transfer property to family members, sell property abroad, or plan their estate effectively.
Gifting Commercial Property: Tax Implications and Strategies to Avoid CGT
Gifting a commercial property to family members or others can be a smart way to avoid CGT—if done correctly. The UK tax system allows for certain reliefs and exemptions when gifting property, but it’s essential to understand the rules to avoid unexpected tax bills.
1. Gifting Commercial Property to Family Members
When you gift a commercial property to a family member, CGT is still applicable as if you sold the property at market value, even though no money changes hands. However, you can use certain reliefs to minimize or avoid CGT liability.
Key Reliefs for Gifting Property:
Holdover Relief
Private Residence Relief (if applicable)
Spousal Transfers (Tax-Free)
2. Using Holdover Relief for Business Assets
If the commercial property is classified as a business asset, you can apply for holdover relief, which defers the CGT liability until the recipient sells the property.
Conditions for Holdover Relief:
The property must be used for business purposes.
The recipient must agree to take on the deferred CGT liability.
Example of Holdover Relief:
🔹 Scenario: Mark owns a commercial warehouse used in his business. He decides to gift the property to his son. By applying for holdover relief, Mark avoids paying CGT at the time of the gift. His son takes on the deferred CGT liability, which will only be triggered if he sells the property in the future.
Gifting Strategy | CGT Implication | Relief Available |
Gift to Family Member | Treated as a sale at market value | Holdover Relief (if a business asset) |
Gift to Spouse/Civil Partner | No CGT due | Tax-Free Transfer |
Gift to Charity | No CGT and income tax relief | Full Exemption |
3. Gifting to Spouses or Civil Partners
One of the simplest ways to avoid CGT is by gifting commercial property to your spouse or civil partner. Transfers between spouses or civil partners are completely tax-free, meaning no CGT is due.
Benefits of Spousal Transfers:
No CGT liability at the time of transfer.
Double the CGT allowance if the spouse later sells the property.
Example:
🔹 Scenario: Sarah owns a commercial office building and wants to sell it. Instead of selling it herself, she transfers the property to her husband, who has a lower income and can benefit from the lower CGT rate (10%). The couple also benefits from double the annual CGT exemption.
4. Gifting to Charity: Tax-Free and Income Tax Relief
If you’re considering philanthropic giving, donating a commercial property to a registered charity is one of the most tax-efficient ways to reduce your overall tax bill.
Benefits of Gifting to Charity:
No CGT due on the donation.
Income tax relief based on the market value of the property.
Example:
🔹 Scenario: David owns a retail property valued at £400,000. Instead of selling it, he donates the property to a charity. As a result, he pays no CGT on the donation and also reduces his income tax liability.
International Tax Considerations for CGT on Commercial Property
If you’re a non-UK resident selling commercial property in the UK, or a UK resident selling property abroad, you’ll need to consider international tax treaties and double taxation agreements.
1. Selling UK Property as a Non-Resident
Since April 2019, non-UK residents are liable to pay CGT on all UK property sales, including commercial property.
What Non-Residents Need to Know:
You must report the sale to HMRC within 60 days.
CGT applies to the gain accrued after April 2019.
Example:
🔹 Scenario: Jane, a non-UK resident, sells her UK office building for £500,000. The property was originally purchased for £300,000. Jane must report the sale to HMRC within 60 days and pay CGT on the £200,000 gain.
2. Selling Property Abroad as a UK Resident
If you’re a UK resident selling property abroad, you’ll still need to pay CGT to HMRC on your gains. However, you may be able to claim relief under double taxation treaties to avoid being taxed twice.
Common Mistakes to Avoid When Minimizing CGT
When it comes to reducing CGT liability, there are several common mistakes that taxpayers make. Avoiding these pitfalls can save you thousands of pounds.
1. Failing to Report the Sale Within 60 Days
Since April 2020, property sellers must report property sales to HMRC within 60 days and pay any CGT owed. Failing to do so can result in hefty penalties.
2. Not Using Annual Exemptions
Many taxpayers forget to use their annual CGT exemption, which can significantly reduce their tax liability. For the 2024/2025 tax year, the exemption is £6,000 per individual.
3. Ignoring Capital Losses
If you’ve made capital losses on other investments, you can offset these losses against your capital gains. Ignoring this strategy could result in overpaying CGT.
Summary of Tax-Efficient Gifting and International Strategies:
Strategy | Key Benefit |
Gifting to Family Members | Holdover Relief can defer CGT liability. |
Spousal Transfers | Completely tax-free. |
Gifting to Charity | No CGT due and income tax relief. |
Selling as a Non-Resident | Must report within 60 days to HMRC. |
Selling Property Abroad | Can claim relief under double taxation treaties. |
How to Structure Your Property Disposal for Maximum Tax Efficiency and Avoid Common Pitfalls
In the previous sections, we’ve covered essential strategies to reduce Capital Gains Tax (CGT) when selling or gifting commercial property in the UK, including holdover relief, spousal transfers, trust structures, and international tax considerations. In this final part of the guide, we’ll focus on tax-efficient inheritance planning, property disposal through trusts, avoiding penalties when reporting property sales, and how to stay compliant with HMRC while minimizing your tax bill.
Let’s dive into the final set of strategies to help you keep more of your profits.
Leveraging Inheritance Tax (IHT) Planning to Minimize CGT
One of the best ways to reduce CGT liability on commercial property is to incorporate it into your estate planning strategy. While inheritance tax (IHT) is a separate tax, it often overlaps with CGT, especially when properties are passed down to heirs. With the right planning, you can avoid double taxation and reduce the overall tax burden on your estate.
1. The 7-Year Rule for Gifting Property
The 7-Year Rule is a critical part of inheritance tax planning. It allows you to gift property during your lifetime, and if you survive for at least seven years after making the gift, the value of the property will be completely excluded from your estate for IHT purposes.
However, CGT may still apply at the time of the gift, unless you use holdover relief or other exemptions.
Example of the 7-Year Rule:
🔹 Scenario: John gifts his commercial property, worth £500,000, to his daughter in 2025. If John survives until 2032, the property’s value is excluded from his estate, reducing his IHT liability. However, if John applies for holdover relief, he can defer the CGT until his daughter sells the property.
Year After Gift | IHT Reduction |
0-3 Years | 0% Reduction |
3-4 Years | 20% Reduction |
4-5 Years | 40% Reduction |
5-6 Years | 60% Reduction |
6-7 Years | 80% Reduction |
After 7 Years | 100% Exempt |
2. Using Business Relief to Reduce IHT and CGT
If your commercial property is part of a trading business, you may qualify for Business Relief, which can reduce the property’s value for IHT purposes by up to 100%. This relief can also be combined with other strategies to defer or eliminate CGT liability.
Conditions for Business Relief:
The property must be actively used for business purposes.
The business must have been trading for at least two years.
Trust-Based Planning for Property Disposal
Using a trust to hold commercial property is a powerful way to manage CGT liability and protect your estate from inheritance tax. There are several types of trusts that can be used for this purpose.
1. Discretionary Trusts for Long-Term Planning
A discretionary trust allows you to spread CGT liability across multiple beneficiaries, each using their annual CGT exemption. It also helps in protecting assets from IHT after seven years.
Benefits of a Discretionary Trust:
Defer CGT liability until the trust sells the property.
Distribute gains across beneficiaries to reduce tax.
Protect the property from creditors or divorce settlements.
Example:
🔹 Scenario: Emma places her commercial property, valued at £800,000, into a discretionary trust. The trust distributes the property’s income and gains to her children over time. Each child uses their £6,000 annual CGT exemption, reducing the overall CGT liability.
2. Bare Trusts for Simplified Ownership
A bare trust is a simpler structure in which beneficiaries are treated as the direct owners of the property for tax purposes. This allows beneficiaries to use their personal allowances to reduce CGT.
Benefits of a Bare Trust:
No CGT liability at the time of transfer.
Beneficiaries can claim allowances to reduce CGT.
Avoiding Penalties When Reporting Property Sales to HMRC
Since April 2020, property sellers must report and pay CGT on property sales within 60 days of the sale’s completion. Missing this deadline can result in hefty penalties and interest charges.
1. Key Reporting Deadlines for CGT
Action | Deadline |
Report property sale to HMRC | Within 60 days |
Pay CGT liability | Within 60 days |
2. How to Report Property Sales to HMRC
You can report your property sale through the HMRC online portal. Make sure to have the following information ready:
Property sale price
Original purchase price
Allowable expenses (e.g., legal fees, renovation costs)
Annual CGT allowance
3. Penalties for Late Reporting
If you fail to report your property sale within the 60-day window, HMRC will impose penalties based on the length of the delay:
Delay | Penalty |
1 Day Late | £100 |
6 Months Late | £300 or 5% of CGT due |
12 Months Late | £300 or 10% of CGT due |
Common Mistakes to Avoid When Minimizing CGT
Even with careful planning, some common mistakes can lead to higher tax bills. Here’s what to watch out for:
Failing to Use Annual Exemptions: Always use your £6,000 CGT allowance (or £12,000 for couples) to reduce taxable gains.
Forgetting to Offset Capital Losses: If you’ve made losses on other investments, offset them against your gains to reduce CGT.
Not Planning Property Sales Across Tax Years: Split property sales across different tax years to maximize annual exemptions.
Summary of Final Tax-Efficient Strategies:
Strategy | Key Benefit |
7-Year Rule for Gifting | Removes property from estate for IHT purposes. |
Business Relief | Reduces IHT liability by up to 100%. |
Discretionary Trusts | Spreads CGT liability across beneficiaries. |
Bare Trusts | Simplifies ownership and tax liability. |
Reporting Property Sales | Avoids penalties and interest charges. |
Audio Summary of Key Points
Summary of Key Points on How to Avoid Capital Gains Tax on Commercial Property in the UK
Capital Gains Tax (CGT) on commercial property in the UK is charged at 10% for basic rate taxpayers and 20% for higher-rate taxpayers, with a £6,000 annual exemption as of the 2024/2025 tax year.
Rollover Relief allows business owners to defer CGT by reinvesting proceeds into qualifying business assets within three years of the sale.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) reduces CGT to 10% on qualifying business assets, up to a £1 million lifetime limit.
Trust structures, such as discretionary trusts and bare trusts, can help spread CGT liability across beneficiaries and protect property from inheritance tax.
Gifting commercial property to a spouse or civil partner is entirely CGT-free, while Holdover Relief can defer CGT when gifting business assets to other family members.
Incorporating a property portfolio into a limited company allows CGT deferral, with future gains taxed under Corporation Tax at a lower rate.
Capital losses from other investments can be offset against gains from commercial property sales to reduce overall CGT liability.
Deferred consideration or instalment sales allow you to spread CGT liability across multiple tax years by receiving payment in stages.
Non-UK residents must pay CGT on UK commercial property sales and report the sale to HMRC within 60 days of completion.
Property owners can use charitable donations, pension funds (SIPPs), and inheritance tax planning strategies to reduce or eliminate CGT liability legally.
FAQs
Q1: Can you avoid paying Capital Gains Tax on a commercial property by living in it?
A: No, living in a commercial property will not exempt you from Capital Gains Tax. However, if part of the property is converted into your main residence, you may qualify for partial Private Residence Relief on that portion of the property.
Q2: Are refurbishment and renovation costs deductible from CGT on commercial property?
A: Yes, you can deduct capital improvement costs, such as renovations and refurbishments, from your capital gains. However, routine maintenance costs are not deductible for CGT purposes.
Q3: Can you claim Capital Gains Tax relief if you sell a commercial property at a loss?
A: Yes, if you sell a commercial property at a loss, you can report it as a capital loss and use it to offset capital gains from other properties or investments.
Q4: Is there a way to defer CGT on commercial property if you plan to reinvest the proceeds?
A: Yes, you can defer CGT by reinvesting the proceeds into qualifying business assets through rollover relief. However, this applies only if the property was used for business purposes.
Q5: Can you use an overseas trust to avoid CGT on UK commercial property?
A: No, setting up an overseas trust will not exempt you from paying UK Capital Gains Tax on UK commercial property. HMRC has strict rules to prevent tax avoidance through offshore structures.
Q6: Do you pay CGT on commercial property sold through a limited company?
A: No, companies do not pay CGT. Instead, they pay Corporation Tax on the profit made from the sale of commercial property, which is currently set at 25% .
Q7: Is Stamp Duty Land Tax (SDLT) deductible from CGT when selling a commercial property?
A: No, Stamp Duty Land Tax is not deductible from CGT. However, legal fees, surveyor costs, and other purchase-related expenses are deductible.
Q8: Can you avoid CGT on commercial property by transferring ownership to a spouse or civil partner?
A: Yes, transfers between spouses or civil partners are exempt from CGT. This can be a useful strategy to maximize the use of both partners’ CGT allowances.
Q9: How does inflation affect CGT on commercial property sales in the UK?
A: Inflation is not directly accounted for when calculating CGT. However, the original purchase price and allowable expenses are used to determine the gain, which may reduce the impact of inflation on your tax bill.
Q10: Are commercial property disposals by charities subject to CGT?
A: No, charities are exempt from paying CGT when selling commercial property, provided the proceeds are used for charitable purposes.
Q11: Can you claim Entrepreneur’s Relief (now called Business Asset Disposal Relief) on commercial property?
A: Yes, you can claim Business Asset Disposal Relief on commercial property if it qualifies as a business asset and you meet the eligibility criteria, such as holding the property for at least two years.
Q12: What happens if you fail to report CGT on a commercial property sale within the 60-day deadline?
A: If you fail to report CGT within 60 days, HMRC will impose penalties. The initial penalty is £100, with additional penalties for further delays, plus interest on unpaid tax.
Q13: Do foreign investors pay CGT on UK commercial property sales?
A: Yes, since April 2019, non-UK residents are required to pay CGT on UK commercial property sales. They must report the sale to HMRC within 60 days.
Q14: How can you use a pension fund to avoid CGT on commercial property?
A: You can transfer your commercial property into a Self-Invested Personal Pension (SIPP) to avoid paying CGT. The property must be used for business purposes, and future growth in the SIPP is tax-free.
Q15: Are inheritance tax and CGT payable simultaneously on the same commercial property?
A: No, CGT is not payable on inherited property. Instead, inheritance tax applies. However, when the heir sells the property, CGT will be due on any gain made after the date of inheritance.
Q16: Can you use capital losses from other investments to reduce CGT on a commercial property sale?
A: Yes, capital losses from other investments can be offset against your capital gains on commercial property to reduce your overall CGT liability.
Q17: Does selling part of a commercial property trigger CGT?
A: Yes, selling part of a commercial property triggers CGT on the portion sold. You will need to calculate the proportionate gain based on the portion of the property disposed of.
Q18: How does the sale of commercial property through a REIT (Real Estate Investment Trust) impact CGT liability?
A: If you sell shares in a Real Estate Investment Trust (REIT) rather than the property itself, you may be liable for CGT on the shares. However, the REIT itself is exempt from CGT on property sales.
Q19: Can you avoid CGT on commercial property by making the property your main residence?
A: No, making a commercial property your main residence does not exempt you from CGT. Private Residence Relief applies only to residential properties used as your primary home.
Q20: Are there any CGT exemptions for properties used for agricultural purposes?
A: Yes, properties used for agricultural purposes may qualify for Agricultural Relief, which can reduce or eliminate CGT liability if the property is actively used for farming.
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