Chartered Accountants and Professional Business Advisers

Beware of tax traps when selling your home

Most people assume there are no tax implications when they sell their home. But you might be faced with an unexpected tax bill.  

Selling a home is generally exempt from capital gains tax (CGT) – as long as the property has been your only or main residence throughout your period of ownership, other than the final 18 months.

This period is to be reduced to nine months for sales of homes after 5 April 2020, although it’s 36 months if you, your spouse or your civil partner is disabled or a long-term resident in a care home.

However, surprisingly, a tax tribunal recently ruled that your ownership period begins when you exchange contracts, not when you complete your purchase and are able to move in.

How it works

In most cases there is an interval of a few weeks between exchange and completion. So, generally, there is a short part of your period of ownership when you simply can’t occupy a property as your main residence. If you’re buying ‘off-plan’ this can be a much longer period.

So, most people selling their home will find that a proportion of any gain is chargeable. Of course, this proportion is often very small, and therefore covered by their annual exemption, which is £11,700 each for 2018/19, £12,000 for 2019/20. If not, CGT is payable at 28% (or 18% to the extent of any unused basic rate band). For disposals after 5 April 2020, if there is any CGT payable, the disposal must be reported and the tax paid within 30 days of completion.

If the property has been let for part of the time you owned it, the main residence exemption can be enhanced, by a maximum of £40,000. This ‘lettings relief’ will change for disposals after 5 April 2020. Details of the proposed change are not yet available.

There is a concession available if you don’t move in on completion because of redecoration or alterations made before moving out of your previous home, or you’re having your new home built on land you have bought. This applies for up to a year, plus a second year if there is a delay outside your control. While it applies, the property is treated as your only or main residence (if it will be afterwards), without affecting the relief on another dwelling for the same period.

Inheritance tax if you bequeath your home

Another tax to think about is inheritance tax (IHT). A rate of 40% is chargeable when you die on the value of your net estate above the £325,000 nil rate band (NRB) if this hasn’t been used to cover lifetime gifts.

This is subject to a number of exemptions, the most common being bequests to a surviving spouse or civil partner. However, this exemption is limited if the deceased is domiciled in the UK for IHT purposes and the survivor isn’t. Any unused NRB, for example, where everything is left to a widow, can be claimed by the executors on her death.

There is also a residence nil rate band (RNRB), which applies if the deceased’s home is left to his or her descendants. The amount is £150,000 if the homeowner dies in 2019/20 and £175,000 if after 5 April 2020, although these figures are reduced if the estate exceeds £2m, and can’t exceed the value of the property bequeathed.

The relief can also apply where homeowners have ‘downsized’ after 7 July 2015. Then a bequest equal to the sale proceeds could qualify for the RNRB. As with unused NRB, any unused RNRB may be used on the survivor’s death.

 

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