My wife owns a five-bedroom flat in London, which she inherited from her Aunt in 2012. The property was worth £315,000 in 2012, but she has since purchased the two servants’ quarters in the loft, and the price is now £650,000. This is her second home, as my wife and I have joint ownership of our family home, where we have lived for 18 years. Is there any way she can avoid paying 28% capital gains tax (CGT) between when we sell later this year at a value of £650,000 and the value when she inherited it of £315,000 in 2012 (so, £335,000 @ 28% = £93,800)? The flat has been rented since 2012.  

Arthur Weller replies:  

Whilst the sale proceeds may well now be £650,000, and the acquisition cost was the probate value in 2012 of £315,000, that does not mean that the capital gain is £335,000. After the inheritance, your wife paid a sum of money (I presume) to purchase the two servants' quarters in the loft. This is allowable expenditure for CGT purposes. So, suppose she spent £100,000; her resultant taxable gain would be £235,000. Furthermore, incidental costs when purchasing the loft quarters and when selling the flat are also allowable expenses. See HMRC’s Capital Gains manual at CG15250. In addition, your wife may have her annual exempt amount (£6,000 for 2023/24) available to reduce her capital gain.