Tax Tips for Selling your Home

Many of us have sold our home without worrying about paying tax on the sale. This is because we’re entitled to Principal Private Residence Relief* which cancels out the Capital Gains Tax* due.

Unfortunately it’s not always that straightforward and you might owe tax under certain circumstances if you don’t minimise tax dues with good advice. Here’s a list of situations that could cause you problems -

You haven’t lived in the House before selling it

The house (or part of it) should be your main home (Principal Private Residence) for some time during ownership. Technically, this could be for only one day but your intention should be to live there permanently. One chap owned a property for 5 months and claimed he moved in and out again because his wife didn’t like it. He was made to pay because there was no clear intention of him wanting to move there permanently – no evidence of him notifying banks, council and other parties and the use of electricity in the house was also too low. So if you’re going to use your property as a home – make sure everyone knows and there’s clear evidence of it – just in case circumstances change!

Renovation and Sale of properties is your Business

So, if you’re running a business doing up properties and then selling them, your profits would be taxed as trade profits rather than under Capital Gains rules. You might also have to pay income tax and national insurance. If this is the case, make certain you keep receipts for all expenses incurred. These should include acquiring, renovating, and selling the property. You can claim this against profit from the sale.

Your garden exceeds 1.24 acres

Although the garden accompanying a residence is normally covered by the Principal Private Residence Relief if it exceeds 0.5 hectares (1.24 acres) then you may have to pay Capital Gains Tax. If you sell the garden before the property and it qualifies for Tax Relief then there will be no tax due. But if you sell the house first you could be faced with a tax bill when you sell the garden.

Tip: If the garden is in excess of 0.5 hectares then ensure it’s not treated as separate to the property. Sometimes part of the garden may be fenced off separately even though the fenced-off part is part of the garden too. If this is the case consider taking the fence down and taking photos prior to the sale to prove that the land is part of the property and can be enjoyed from the property. For gardens, the use (business/personal) of the garden is considered at the time of sale and not during the whole period of ownership.

Part of your house is being used as an office

If you use any part of your property for business then you may wish to ensure that no part of the premises is used exclusively for business purposes. So if you do work in one room, by making sure that the room has dual purpose (business and personal), there’ll be no tax on it.

If any part of the garden is used for business while you own the property then consider if the use can be reversed prior to sale and ensure you have evidence of this.   

You’ve rented out your Home

If your home or part of it is rented out while you own it – you may be expected to pay CGT. The tax liability may be minimal but the calculations can be quite complex. If a small part of your home (like one room) is rented out while it is your main residence, you might also be entitled to “rent a room relief.” You could get rental income up to £4250 annually, tax free.

You have more than one home

For tax purposes, you are only allowed one main residence and married couples or civil partners are only entitled to one main residence.

You have two years after acquiring your second property to consider making an election for the new property to be your main home for tax purposes. You’re entitled to change your mind within defined deadlines, so you can elect the first property to become your main home again.

Providing care is taken, it may be possible to wipe out significant amounts of Capital Gains Tax on the second property when it’s sold.

If you and your partner both own properties when you get together consider which property should be elected as your main residence to help minimise Capital Gains Tax on the eventual sale of one property.

Now this may sound like expensive damage control but if you do miss the deadline for making a claim, acquiring a third property starts the clock again and a claim can be made for any of your properties within two years of the third property being acquired.   

You’re getting Separated or Divorced

Whether you’re married or in a civil partnership, the cost of breaking-up can make things worse if you ignore tax.

As you know, while you are together all transfer of assets are usually free of CGT irrespective of what money passes between you. But once one of you leaves the family home this tax exemption is lost after the end of the tax year in which you separate. This can mean unexpected tax liability on the eventual sale or transfer of the property.

You may alleviate this by a Revenue concession, but not always. So, if you are separating, take advice early and ensure that unexpected tax bills don’t arise.


*Private Residence Relief - is the name given to the tax relief designed to ensure that most people don't face a Capital Gains Tax bill when they sell their home.

*Capital Gains Tax (CGT) - When an asset (like property, or shares) is sold at a profit, the profit may be liable to a tax called Capital Gains Tax. In calculating the tax you need to consider capital gains allowances, adjustments for inflation and different computations depending on the age of the asset (Or just get yourself a smart advisor!)

 

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