Home sweet home, or is it?

Published by Jamie Hopkins on 3 December 2019

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Many of us are familiar with the concept that you don’t pay Capital Gains Tax on any gain that you make on the sale of your home. However, is it always that simple?

If you purchase a property on the open market and then sell it, having lived in it as your sole residence throughout the period you owned it, yes, the whole gain will be exempt. There are even various exemptions for periods of absence and the last 18 months (reducing to 9 months from 6 April 2020) are always exempt, regardless of whether you were living in the house during this period. More thought is needed though if your circumstances are less straightforward.

We are now accustomed to watching television programmes showing us design projects for building your own house. These may mention tax in passing at a basic level, but don’t necessarily highlight hidden pitfalls. Many of the projects shown can extend over several years, which can present tax problems when the property is sold later on.

You can normally only have one principal private residence at a time. So, what happens if you decide to build the home of your dreams and acquire a piece of land to build it on, whilst continuing to live in your current house? The good news is that HMRC by concession will allow one year of the period of building the house to be exempt from a capital gains charge. This may be extended up to 24 months where there are reasons for the delay which are beyond your control.

If you later decide to sell the property you have built, having lived in it as your main home, the capital gain is calculated and spread evenly over the period of ownership from when the land is acquired to when the new property on it is sold. The proportion that is exempt because, for example it was your main home, is then deducted to leave the chargeable gain. If you have taken more than a year to build the house before you move into it, some of this period may be chargeable to Capital Gains Tax, subject to what other reliefs may be available to you, for example the annual capital gains exemption.

Many of us acquire properties other than in the more conventional way, and the above example is just an illustration of how you can occupy a house throughout as your home but still get caught out. As always, the devil is in the detail. So, if you are planning on selling a property, you would be wise to consider the tax implications first. There may be simple ways to reduce your exposure to tax.

For more information, please contact Jamie Hopkins, Senior Manager in Private Client Tax.

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