Tax when selling your home & tax reliefs
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.
Who qualifies for Private Residence Relief
Generally, if you have lived in your home and it has been your only home all the time that you owned it, you will not have to pay Capital Gains Tax on any money you make when you sell it because it will be covered by Private Residence Relief.
However, you may not qualify for relief on the whole property if you:
- have a garden or grounds that extend to more than 0.5 hectares
- have extensive outbuildings
- have used any part of it exclusively for business purposes
- bought it primarily in order to make an early sale at a profit
If you’re selling your home and you own more than one property, or you’ve used part of the property for business purposes, such as using one room as an office, taking in lodgers or letting out all or part of the property for a while, you may be liable to pay Capital Gains Tax
Whether or not you still qualify for some Private Residence Relief will depend on your exact circumstances, so if in doubt, you should contact HM Revenue&Customs (HMRC) by phone or letter for advice.
When you no longer live in the property
Even if you no longer live in your property, you can still qualify for the full amount of Private Residence Relief, provided that:
- the property has been your main home from the time that you bought it
- it has otherwise fully qualified for Private Residence Relief (for example, you have not used part of the property exclusively for business purposes)
- you sell it within three years of moving out or it no longer being your main home
Owning more than one home
If you live in more than one property you can tell HMRC which one you want to be treated as your main home, or ‘principal residence’, for Capital Gains Tax purposes. You do have to reside in, not just own, the property to nominate it as your main home.
You have to make the nomination within two years of changing the number of properties you live in, whether the change is an increase in the number of homes or a decrease.
Failing to tell HMRC which is your main home
If you don’t tell HMRC which property you want to call your main home, the question of whether a home that you sell has been your main home and eligible for Private Residence Relief has to be decided on the facts. So it makes sense for you to decide and notify HMRC before the two years are up.
You don’t have to keep the same house as your main home. Once you have nominated a main home you can tell HMRC at any time that a different property should be the one that qualifies for Private Residence Relief but you cannot backdate the change more than two years. You have to reside in a property as your home for it to qualify.
Selling a property you bought for someone else to live in
If you buy a house for someone else to live in and own it but don’t live in it yourself, you will not be eligible for private residence relief when you come to sell the property. You are effectively making an investment in a property, so when it is sold at a ‘gain’ (profit) you will be liable to pay Capital Gains Tax on that gain.
One alternative is to give or lend money to the person so that they can buy the property themselves. If the property belongs to them and is their main residence they can claim Private Residence Relief when they sell it.
The law in this area can be complex so consider seeking professional advice. You should also look into the Inheritance Tax implications of making a gift.
Tax on selling property
If you are selling a property that is your main home you won’t have to pay tax on it – provided you satisfy certain conditions. If you’re selling a property that isn’t your main home, it is likely that you will have to pay Capital Gains Tax.
Tax on the sale or disposal of your main home
You do not have to pay tax as long as:
- you bought it, and incurred any expenditure on it, primarily to use it as your home rather than with a view to making a profit on its sale
- the property was your only home throughout the period you owned it (ignoring the last three years of ownership)
- you did actually use it as your home all the time that you owned it and, throughout that period, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger
- the garden and area of grounds sold with it does not exceed 5,000 square metres (about one and a quarter acres) including the site of the house
If you are married or in a civil partnership and not separated you and your spouse or civil partner can have only one such residence between you.
Even if all these conditions are not met, you may still be entitled to tax relief.
Tax on property that’s not your main home
You will normally have a chargeable gain if your property is worth more than you paid for it when you sell or dispose of it. However, the first £10,100 of your total taxable gains are tax free (for the tax year 2010-11 – the budget proposes this will be £10,600 for the tax year 2011-12).
It’s worth bearing in mind that:
- when working out the chargeable gain you can deduct some of the costs of buying, selling and improving the property
- if you have made a loss on the property, you may be able to set that off against other chargeable gains you may have
- if you are living together you can transfer property to your husband, wife or civil partner without having to pay Capital Gains Tax
- if you give it or sell it cheaply to your children or to others, you may be liable to pay Capital Gains Tax
What paperwork do you have to keep?
HM Revenue&Customs (HMRC) recommends that you keep the following information and documents relating to the property:
- contracts for the purchase or sale, lease or exchange of the property
- any documentation that describes properties you acquired but did not buy yourself: for example, a gift or an inheritance
- details of any property you have given away or put into a trust
- copies of any valuations taken into account in your calculation of gains or losses
- bills, invoices or other evidence of payment records such as bank statements and cheque stubs for costs you claim for the purchase, improvement or sale of the property
It would also be sensible to keep correspondence with buyers or sellers leading up to the sale of the property.