How to Avoid Capital Gains Tax On Commercial Property
- MAZ
- Jul 31
- 17 min read
The Audio Summary of the Key Points of the Article:
Understanding CGT on Commercial Property and Key Reliefs
Now, let’s get straight to the heart of it: how do you actually avoid or reduce Capital Gains Tax (CGT) when selling commercial property in the UK? As of June 2025, CGT is a tax on the profit (or “gain”) you make when selling assets like commercial property, charged at 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers. Unlike residential property, which often has stricter rules, commercial property offers unique opportunities to minimise your tax bill through reliefs, strategic timing, and clever structuring. Let’s break it down with practical steps and examples to help you navigate the system like a pro.
What Exactly Is CGT on Commercial Property?
Let’s start with the basics. CGT applies when you sell (or “dispose of”) a commercial property—think office buildings, shops, or warehouses—and make a profit. The taxable gain is calculated by subtracting the original purchase price, allowable costs (like legal fees or improvements), and the £3,000 annual exempt amount from your sale price. For the 2025/26 tax year, the CGT rates for commercial property align with residential property: 18% if your total taxable income and gains fall within the basic rate band (£12,570–£50,270 after your personal allowance), and 24% for anything above that. If you’re a higher-rate taxpayer, expect to pay 24% on most gains.
Here’s a quick example: Suppose Ewan, a shop owner in Manchester, bought a commercial unit for £200,000 in 2015, spent £20,000 on renovations, and sold it in June 2025 for £350,000. His gain is £350,000 - (£200,000 + £20,000) = £130,000. After deducting the £3,000 allowance, his taxable gain is £127,000. If Ewan’s income pushes him into the higher-rate band, he’ll pay 24% CGT, or £30,480. Ouch! But don’t worry—there are ways to soften this blow, which we’ll explore below.
Why Business Asset Disposal Relief Could Be Your Best Mate
Now, here’s a game-changer for business owners: Business Asset Disposal Relief (BADR). This relief slashes the CGT rate to 14% (rising to 18% from April 2026) on gains up to a lifetime limit of £1 million, but only if the property is used in your trading business—not just rented out. For example, if you run a bakery from a commercial property you own, you might qualify, but if you’re leasing it to someone else, you’re out of luck.
Let’s look at Priya, who owns a small factory in Birmingham used for her manufacturing business. She sells it in July 2025 for a £400,000 gain. Since it qualifies for BADR, she pays 14% on the first £400,000 (assuming she hasn’t used her £1 million limit), saving £40,000 compared to the standard 24% rate. To claim BADR, you must report the sale in your Self-Assessment tax return by 31 January 2027 for the 2025/26 tax year. Check eligibility on GOV.UK.
Can Rollover Relief Save You Money?
Here’s another trick up your sleeve: Rollover Relief. This lets you defer CGT by reinvesting the proceeds from selling one commercial property into another business asset, like new premises. The catch? The new asset must be bought within one year before or three years after the sale, and it must be used for your trade.
Imagine Alastair, a Cardiff-based entrepreneur, sells his office for a £500,000 gain in May 2025. He reinvests the full proceeds into a new warehouse within 12 months. By claiming Rollover Relief, he defers the entire CGT bill until he sells the new warehouse. This is a fantastic way to keep cash flow intact while expanding your business. You’ll need to claim this through your tax return, and HMRC’s guidance on GOV.UK has the details.
Table 1: CGT Rates and Allowances for 2025/26 Tax Year
Category | Details |
Annual Exempt Amount | £3,000 per individual (£1,500 for trusts, £3,000 for vulnerable trusts) |
Basic Rate (18%) | Applies to gains within the basic rate band (£12,570–£50,270 after allowance) |
Higher Rate (24%) | Applies to gains above the basic rate band |
Business Asset Disposal Relief | 14% (rising to 18% from April 2026) on qualifying gains up to £1 million |
Reporting Deadline | 31 January following the tax year for UK residents; 60 days for non-residents |
What About Incorporation Relief?
Now, consider this: if you’re a sole trader or partnership, transferring your commercial property to a limited company can trigger CGT—but Incorporation Relief can help. This relief lets you defer the tax by exchanging the property for shares in the company. The gain is “rolled over” until you sell those shares.
Take Siobhan, who runs a consultancy from a Leeds office. She transfers her £600,000 property to her new company in 2025, generating a £300,000 gain. With Incorporation Relief, she pays no CGT now, but the gain is deferred until she sells the shares. If she takes 30% cash instead of shares, she’d owe CGT on 30% of the gain immediately. See GOV.UK for more.
Are There Costs You Can Deduct?
Be careful! Many taxpayers miss out on deductible costs that can shrink their taxable gain. You can deduct the purchase price, improvement costs (e.g., adding a new roof), and incidental costs like legal fees or estate agent commissions. Maintenance costs, like painting, don’t count.
For instance, Idris buys a warehouse in Glasgow for £300,000, spends £50,000 on a new loading bay, and pays £10,000 in legal fees. He sells it for £500,000 in 2025. His gain is £500,000 - (£300,000 + £50,000 + £10,000) = £140,000. After the £3,000 allowance, he pays CGT on £137,000, saving £57,000 by deducting those costs properly.
Timing Your Sale Strategically
So, the question is: can you time your sale to save tax? Absolutely. Spreading gains across multiple tax years lets you use the £3,000 allowance each year. If Bronwyn owns two commercial properties and sells one in March 2025 (£50,000 gain) and another in April 2025 (£50,000 gain), she uses the £3,000 allowance twice, saving £1,440 in CGT compared to selling both in one year.
Advanced Strategies and Practical Applications for Minimising CGT
Now, let’s dig deeper into some clever, HMRC-approved ways to keep more money in your pocket when selling commercial property. The basics—like Business Asset Disposal Relief and Rollover Relief—are great, but there are more nuanced strategies and real-world scenarios that can make a big difference for UK taxpayers and business owners in 2025. From trusts to gifting, mixed-use properties to non-resident rules, this section will arm you with practical tools and examples to tackle CGT head-on. Let’s dive in with fresh ideas and detailed analysis.
Can You Use Trusts to Defer CGT?
Here’s a strategy that’s often overlooked: transferring your commercial property into a trust. Trusts can defer CGT in specific cases, especially if you’re planning for succession or want to protect assets. When you transfer a property to a discretionary trust, the transfer is treated as a disposal at market value, which could trigger CGT. However, if you retain an interest in the trust (e.g., as a beneficiary), you can claim Holdover Relief to defer the tax until the trust disposes of the property.
Let’s say Rhiannon, a Bristol-based landlord, transfers her £700,000 office building into a trust for her children in June 2025. The property’s original cost was £400,000, so the gain is £300,000. With Holdover Relief, she pays no CGT now, and the trust inherits the property at the original £400,000 base cost. When the trust sells it later, CGT applies, but Rhiannon’s deferred the immediate hit. Check the rules on GOV.UK.
Be aware, though: trusts have their own CGT rules. They get a £1,500 annual exempt amount (half of an individual’s £3,000), and gains are taxed at 24% for commercial property. Plus, setting up a trust involves legal costs, so weigh the benefits against the complexity.
What If You Gift the Property to Family?
Now, consider this: gifting your commercial property to a spouse, civil partner, or family member can be a tax-savvy move. Transfers between spouses or civil partners are CGT-free, provided you’re living together. The recipient takes on the property at your original cost, deferring any gain until they sell it.
For example, Tariq, a London retailer, transfers his shop (bought for £250,000, now worth £500,000) to his wife, Ayesha, in 2025. No CGT is due, and Ayesha inherits the £250,000 base cost. If she sells it later for £600,000, she’ll pay CGT on £350,000 (minus the £3,000 allowance), but the tax is delayed, giving them flexibility to plan. Gifting to other family members, like children, may trigger CGT unless Holdover Relief applies (e.g., for business assets). See GOV.UK for details.
Gifting isn’t a silver bullet. If the recipient sells soon after, they’ll face the same CGT liability, so this works best for long-term planning.
Table 2: Key CGT Reliefs for Commercial Property (2025/26)
Relief | Eligibility | Benefit |
Business Asset Disposal Relief | Property used in your trade, owned for 2+ years, lifetime limit £1 million | Reduces CGT rate to 14% (18% from April 2026) |
Rollover Relief | Reinvest proceeds in qualifying business assets within 1 year before/3 years after | Defers CGT until new asset is sold |
Incorporation Relief | Transfer property to a company in exchange for shares | Defers CGT until shares are sold |
Holdover Relief | Gift business assets or transfer to a trust | Defers CGT until recipient or trust disposes of the asset |
How Do Mixed-Use Properties Affect CGT?
Be careful! If your property is part-commercial, part-residential (e.g., a shop with a flat above), CGT calculations get tricky. The gain is split between the commercial portion (taxed at 18%/24%) and the residential portion (also 18%/24% but ineligible for some reliefs, like BADR). You’ll need a professional valuation to apportion the gain accurately.
Take Gwen, who owns a Cardiff building with a ground-floor café and an upstairs flat. She sells it in July 2025 for £800,000 (bought for £500,000). A valuer determines 60% of the gain (£180,000) is commercial, and 40% (£120,000) is residential. Gwen qualifies for BADR on the commercial portion, paying 14% (£25,200), but pays 24% (£28,800) on the residential portion after the £3,000 allowance. Splitting the gain correctly saves her thousands compared to treating it all as residential.
This is where a tax adviser earns their keep. HMRC can challenge valuations, so keep detailed records. Visit GOV.UK for guidance.
Can Non-Residents Avoid CGT?
Now, it shouldn’t surprise you that non-residents face different rules. Since April 2019, non-UK residents pay CGT on UK commercial property disposals, with a 60-day reporting deadline via HMRC’s online service. However, non-residents can still claim reliefs like BADR or Rollover Relief if eligible.
For instance, Elena, a non-resident investor, sells a Manchester warehouse in 2025 for a £200,000 gain. She reinvests in another UK commercial property, claiming Rollover Relief to defer the CGT. She must report the sale within 60 days, even if no tax is due, using HMRC’s portal at GOV.UK. Missing this deadline can lead to penalties, so set a reminder!
Step-by-Step Guide: Claiming Rollover Relief
Here’s a practical guide to make Rollover Relief work for you:
Confirm Eligibility: Ensure the property was used in your trade (not just leased out) and the new asset qualifies (e.g., another commercial property or business equipment).
Time the Purchase: Buy the new asset within one year before or three years after the sale. Partial reinvestment reduces the relief proportionally.
Calculate the Gain: Subtract the original cost and allowable expenses from the sale price. For example, a £500,000 sale with a £300,000 base cost gives a £200,000 gain.
Claim the Relief: Report the sale and reinvestment in your Self-Assessment tax return by 31 January following the tax year (e.g., 31 January 2027 for 2025/26).
Keep Records: Retain purchase/sale contracts and receipts for HMRC checks.
Seek Advice: Consult a tax adviser if the reinvestment involves complex assets or partial claims.
Why Losses Can Be a Hidden Gem
None of us likes losses, but CGT losses can reduce your tax bill. If you sell a commercial property at a loss, you can offset it against other gains in the same tax year or carry it forward indefinitely. Let’s say Dafydd sells a Swansea office for a £50,000 loss in 2025 but makes a £100,000 gain on another property. His net taxable gain is £100,000 - £50,000 = £50,000 (minus the £3,000 allowance), saving him £11,520 at the 24% rate.
You must report losses to HMRC within four years of the tax year-end (e.g., by 5 April 2030 for 2025/26). Details are on GOV.UK.
Is Timing Across Tax Years Worth It?
So, the question is: can splitting sales across tax years save you more? If you own multiple properties, staggering disposals lets you use the £3,000 annual exempt amount each year. For instance, Meera plans to sell two shops, each with a £60,000 gain. Selling both in 2025/26 means one £3,000 allowance, leaving £117,000 taxable. Splitting them over 2025/26 and 2026/27 gives two allowances, reducing the taxable amount to £114,000, saving £720 at 24%.
Summary of Key Strategies to Minimise CGT on Commercial Property
Now, let’s wrap things up with the most critical points you need to know to keep your CGT bill as low as possible when selling commercial property in the UK. This section distils the essential strategies and insights into a concise, actionable summary, ensuring you’ve got everything you need to make smart decisions in 2025. Each point is backed by the practical advice and examples we’ve explored, designed to help UK taxpayers and business owners navigate the tax maze with confidence.
How Can You Use Losses to Offset Gains?
Let’s kick off with a silver lining: losses can be your friend. If you sell a commercial property at a loss, you can offset it against other capital gains in the same tax year or carry it forward indefinitely to reduce future tax bills. For example, a £50,000 loss can cut a £100,000 gain in half, saving you up to £12,000 at the 24% rate. Just make sure to report losses to HMRC within four years, as outlined on GOV.UK.
Reporting losses isn’t automatic—you need to include them in your Self-Assessment tax return. Keep detailed records of the sale, including contracts and costs, to back up your claim. This strategy is especially useful if you’re selling multiple properties and want to balance your tax liability.
Table 3: Key Deadlines for CGT Reporting (2025/26)
Action | Deadline |
UK Residents: Report and Pay | 31 January following the tax year (e.g., 31 January 2027 for 2025/26) |
Non-Residents: Report Sale | Within 60 days of the property disposal via HMRC’s online service |
Claim Losses | Within 4 years of the tax year-end (e.g., 5 April 2030 for 2025/26) |
Can Spousal Transfers Save Tax?
Here’s a neat trick: transferring your commercial property to your spouse or civil partner is CGT-free if you’re living together. This defers the tax until they sell, letting you reset the clock on planning. For instance, transferring a property with a £250,000 gain to your spouse means no immediate tax, and they inherit your original cost base. It’s a simple way to delay CGT, especially if your spouse is in a lower tax band. See GOV.UK for the rules.
This works best for long-term planning, but it’s not a permanent fix—your spouse will face CGT when they sell, so coordinate your strategy carefully.
Why Is Timing So Important?
So, the question is: can you outsmart the taxman by timing your sales? Absolutely. Spreading disposals across multiple tax years lets you use the £3,000 annual exempt amount each year, potentially saving thousands. Selling two properties with £60,000 gains each over two years, rather than one, could save £720 at the 24% rate by doubling your allowance. Plan your sales around the tax year-end (5 April) to maximise this benefit.
Timing also matters for reliefs like Rollover Relief, where you have a one-year-before to three-years-after window to reinvest. Check your calendar and align your strategy with HMRC deadlines.
Summary of the Most Important Points
Claim Business Asset Disposal Relief (BADR): Reduces CGT to 14% (18% from April 2026) on qualifying commercial property gains up to a £1 million lifetime limit if used in your trade.
Use Rollover Relief: Defer CGT by reinvesting sale proceeds into another business asset within one year before or three years after the sale.
Apply Incorporation Relief: Defer CGT when transferring property to a company in exchange for shares, ideal for sole traders incorporating their business.
Leverage Holdover Relief: Defer CGT by transferring business property to a trust or gifting to family (non-spousal), delaying tax until the recipient sells.
Deduct Allowable Costs: Reduce taxable gains by deducting purchase costs, improvements, and fees like legal or agent commissions.
Offset Losses: Use losses from other disposals to reduce taxable gains, reporting them within four years to HMRC.
Transfer to Spouse: Move property to a spouse or civil partner CGT-free to defer tax, ensuring you’re living together.
Split Mixed-Use Gains: For mixed-use properties, apportion gains between commercial (BADR-eligible) and residential portions to optimise reliefs.
Time Sales Across Tax Years: Spread disposals over multiple years to use the £3,000 annual exempt amount repeatedly, lowering your tax bill.
Meet Reporting Deadlines: UK residents report by 31 January following the tax year; non-residents within 60 days of disposal via GOV.UK.
Be careful! HMRC is strict about compliance, and missing deadlines or misclaiming reliefs can lead to penalties or audits. Always keep detailed records—sale contracts, improvement receipts, and valuation reports for mixed-use properties. If you’re unsure, a tax adviser can help navigate complex reliefs or valuations, especially for trusts or non-resident rules.
For example, consider Owain, a Liverpool business owner who sold a mixed-use property in 2024. He missed apportioning the gain correctly and paid £10,000 more in CGT than necessary. A quick consultation with an accountant could have saved him the hassle. Use HMRC’s resources on GOV.UK to stay on top of rules and deadlines.
This summary ties together the most practical, HMRC-compliant ways to minimise CGT on commercial property, giving you a clear roadmap to save money while staying within the law. Whether you’re a small business owner or a seasoned investor, these strategies can help you keep more of your hard-earned profits.
FAQs
Q1: What is the difference between capital gains tax on commercial and residential property in the UK?
A1: Capital gains tax on commercial property is charged at 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers, with eligibility for reliefs like Business Asset Disposal Relief. Residential property also faces 18% and 24% rates but is ineligible for certain reliefs, such as Business Asset Disposal Relief, and may attract a 3% stamp duty surcharge if owned as a second property.
Q2: Can capital gains tax be avoided by reinvesting in a residential property instead of a commercial one?
A2: Reinvesting in a residential property does not qualify for Rollover Relief, which is limited to business assets like commercial properties or equipment. Capital gains tax can only be deferred by reinvesting in qualifying business assets under specific HMRC rules.
Q3: How does capital gains tax apply to commercial property held in a pension fund?
A3: Commercial property held in a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) is generally exempt from capital gains tax when sold, as gains within the pension fund are tax-free. However, withdrawals from the pension may be subject to income tax.
Q4: Can a commercial property be sold to a charity to avoid capital gains tax?
A4: Selling a commercial property to a charity at market value triggers capital gains tax as it’s treated as a normal disposal. However, gifting the property to a charity can qualify for Gift Relief, deferring the tax, provided the charity is registered and the gift meets HMRC conditions.
Q5: What happens to capital gains tax if a commercial property is inherited?
A5: When a commercial property is inherited, no capital gains tax is due at the time of inheritance. The beneficiary inherits the property at its market value at the date of death, which becomes their base cost for calculating future gains when they sell.
Q6: Can capital gains tax be reduced by donating part of the commercial property sale proceeds to charity?
A6: Donating sale proceeds to a charity may qualify for Gift Aid, reducing income tax liability, but it does not directly reduce capital gains tax. However, gifting the property itself to a charity before selling could defer the gain via Gift Relief.
Q7: How does capital gains tax apply to commercial property owned by a partnership?
A7: In a partnership, each partner is liable for capital gains tax on their share of the gain from selling a commercial property, based on their profit-sharing ratio. Reliefs like Business Asset Disposal Relief may apply if the property is used in the partnership’s trade.
Q8: Can capital gains tax be avoided by converting a commercial property to residential use before selling?
A8: Converting a commercial property to residential use before selling does not inherently avoid capital gains tax, as the gain is calculated based on the entire ownership period. The residential portion may lose eligibility for certain reliefs, potentially increasing the tax liability.
Q9: What are the capital gains tax implications of leasing a commercial property before selling it?
A9: Leasing a commercial property before selling does not directly affect capital gains tax, which is calculated on the gain from the sale. However, if the lease reduces the property’s market value, it could lower the taxable gain, but HMRC may scrutinise such arrangements.
Q10: Can capital gains tax be deferred by exchanging a commercial property for another asset?
A10: Exchanging a commercial property for another business asset may qualify for Rollover Relief, deferring capital gains tax, provided the new asset is used in the trade and acquired within the one-year-before or three-years-after window. Non-business assets do not qualify.
Q11: How does capital gains tax apply to commercial property sold by a company rather than an individual?
A11: Companies pay Corporation Tax on gains from selling commercial property, not capital gains tax, at the main rate of 25% for profits over £250,000 or the small profits rate of 19% for profits below £50,000. Reliefs like Rollover Relief may still apply.
Q12: Can capital gains tax be avoided by selling a commercial property in instalments?
A12: Selling a commercial property in instalments spreads the gain over the payment period, potentially allowing the use of multiple annual exempt amounts. However, HMRC treats the full gain as arising in the tax year of the sale unless specific conditions are met.
Q13: What are the capital gains tax rules for commercial property owned by a non-UK company?
A13: Non-UK companies are subject to Corporation Tax on gains from UK commercial property sales, reported within 60 days of disposal. They may claim reliefs like Rollover Relief if reinvesting in UK business assets, but must comply with HMRC’s reporting requirements.
Q14: Can capital gains tax be reduced by claiming capital allowances on a commercial property?
A14: Capital allowances reduce taxable income for assets like fixtures in a commercial property but do not directly reduce capital gains tax. However, claiming allowances may lower the property’s base cost, increasing the gain, so careful planning is needed.
Q15: How does capital gains tax apply to a commercial property compulsorily purchased by the government?
A15: Capital gains tax applies to gains from a compulsory purchase, but Rollover Relief may defer the tax if the proceeds are reinvested in another business asset. Compensation for loss of business may be treated separately, potentially reducing the taxable gain.
Q16: Can capital gains tax be avoided by demolishing a commercial property before selling the land?
A16: Demolishing a commercial property before selling the land does not avoid capital gains tax, as the gain is calculated on the disposal of the entire asset, including the land’s market value. Demolition costs may be deductible as an allowable expense.
Q17: What are the capital gains tax implications of selling a commercial property during divorce proceedings?
A17: During divorce, transferring a commercial property to an ex-spouse as part of a settlement can be CGT-free if done before the final divorce decree, provided the couple still lives together. Post-divorce transfers may trigger capital gains tax unless reliefs apply.
Q18: Can capital gains tax be reduced by improving a commercial property before selling it?
A18: Improvements like adding a new extension can be deducted as allowable costs, reducing the taxable gain. However, maintenance costs, like repairs, are not deductible, and improvements must be capital in nature to qualify.
Q19: How does capital gains tax apply to commercial property held in an offshore trust?
A19: UK residents benefiting from an offshore trust holding commercial property may face capital gains tax on distributions or when the trust sells the property. Non-resident trusts may be exempt, but anti-avoidance rules could apply, taxing UK beneficiaries.
Q20: Can capital gains tax be avoided by selling a commercial property just before moving abroad?
A20: Selling a commercial property before moving abroad does not automatically avoid capital gains tax, as UK residents are taxed on disposals in the tax year they occur. Non-residents may still face tax on UK property gains, with a 60-day reporting requirement.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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