Tax when you sell your home

Our experts guide you through the process of Capital Gains Tax when selling your own home

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

What is Private Residence Relief and does it apply to you?

Private Residence Relief is a form of tax relief and it means that you won’t have to pay any Capital Gains Tax on the profits of selling your home, so long as the following circumstances apply (and they ALL have to apply for you to be able to claim this relief):

  • You only have one main home and you have lived in it as your main home for all the time you’ve owned it.

  • You haven’t let that home (or any part of it) out – this doesn’t include taking in a single lodger. If you have let out a room to a single lodger over the time you have owned your house you don’t need to worry, this doesn’t stop you from claiming this tax relief.

  • You haven’t used any part of it for business only – for example, if one room of your house has been exclusively used as an office from which you have run a business and hasn’t had any other use at all within the home.

  • The grounds, including all buildings and outbuildings, are less than 5,000 square metres in total – this is just over an acre in land if you prefer to think of it in those measurements.

  • You didn’t buy it just to make a gain.

If these apply you are entitled to claim Private Residence Relief but you don’t need to do anything special to claim it – you will automatically get this tax relief.

Married couples and civil partners can only count one property as their main home and any one time – you can’t each specify a main home and claim Private Residence Relief on both homes when you sell them.

If you don’t meet all of these criteria, you might have to pay some Capital Gains Tax if you make a profit on the sale of your home. It can get complicated, trying to work out how much you might owe, so expert advice can really pay – our tax preparation specialists are on hand to make your taxes less complicated, so call us on 0330 122 9972.

If you are selling a property that isn’t your main home, the rules on Capital Gains Tax are different – check out our guide to ‘Tax when you sell property’ for more information.

How do you work out your gain?

If you don’t qualify for Private Residence Relief (or you only partially qualify), you might have to pay Capital Gains Tax on any gain (profit) you make on the sale of your home. To work out whether you will need to pay, firstly you need to work out your gain – how much profit you made when you sold your home.

HMRC usually calculate the gain as the difference between what you paid for your home and what you sell it for but in some instances, you have to use the market value instead of the purchase value. HMRC expect you to use the market value if any of the following apply:

  • It was a gift (the rules are somewhat different if the gift is to your husband, wife, civil partner or a charity).

  • You sold it for less than it was worth to help the buyer.

  • You inherited the house and you don’t know its Inheritance Tax Value.

  • You owned it before April 1982.

If you are not a UK resident for tax purposes, you only pay tax on gains since 5th April 2015.

Can you deduct any costs?

Yes, HMRC will allow you to deduct some of the costs of buying, selling or improving your property from the profit you make when you sell. Do take note though, that they class improvements to be large-scale improvements – such as a loft conversion or building an extension. Decorating costs won’t be allowed and in most cases, new bathrooms or kitchens won’t be allowed either as HMRC will likely consider that to be a “like for like” replacement – i.e. you are replacing a sink for a sink, toilet for a toilet and so on.

Costs that HMRC allow you to deduct include:

  • Estate agents’ fees;

  • Solicitors’ fees;

  • The cost of improvement works – see our above advice for what would count.

Some costs won’t be allowed, such as any interest on a mortgage or loan to buy your home. Special rules also apply if your home has been compulsorily purchased for any reason, or you are selling a lease. If you’re not sure whether you can deduct a cost, expert advice can make all the difference – our team of tax preparation specialists can help you to work out what you can and can’t deduct from your gains, so call our friendly team on 0330 122 9972.

How do you work out how much Capital Gains Tax you need to pay?

Firstly, you need to know your net gain (how much you made minus any costs you can deduct) as well as any reliefs you might be entitled to claim – once you know this, you can work out how much you will have to pay.

HMRC have an online Capital Gains Tax calculator to help you work out how much you might have to pay but it only works in the simplest of circumstances. If any of the following apply, you can’t use it:

  • If you have sold any other chargeable assets in that tax year, for example shares or valuable antiques.

  • If you have reduced your share of a property that you will jointly own.

  • If you can claim any other form of tax relief other than Private Residence Relief.

  • If you are a company, agent, personal representative or trustee.

If you are struggling to work out what you owe, call out friendly team of experts on 0330 122 9972 and they can help take the sting out of your taxes.

What happens if you live away from home?

If you live away from your home, you might not be able to claim the full amount of Private Residence Relief, although you will still be able to claim it for certain periods, such as:

  • You are always entitled to Private Residence Relief for the final 18 months before you sell your home but it must have been your only and main residence at some point while you have owned it.

  • You can get Private Residence Relief for the first 12 months you owned the home if it was being built, renovated or you couldn’t sell your own home AND you lived in it as your only or main residence at the end of the 12 months. Both of those conditions have to apply to be able to claim that tax relief.

These rules only apply to UK residents.

If you have one home or nominated your home, you can get relief even if you lived away from it, if any of the following circumstances apply:

  • You lived away from it for any reason for periods that add up to 3 years or less.

  • You lived away from it for up to 4 years if you had to live away from home in the UK for work purposes.

  • You lived away for any period of time because you were working outside of the UK.

You do have to have lived in the house before and afterwards unless your job prevented you from being able to do so.

If you only own one home, you can get Private Residential Relief for the last 36 months before you sell your home if any of the following apply to you:

  • You’re disabled.

  • You’re in long term residential care.

  • You sold the property before 6th April 2004.

What if you own more than one home?

Most of the time, HMRC will only allow you to claim relief for one home at any one time so you will need to work out when each of those properties was classed as your main home. If you are a married couple or in a civil partnership, you can only claim for one home per couple at any one time – you can’t each nominate a separate home as your main home to claim tax relief on both.

If you have nominated a home as your main home, HMRC won’t allow you to claim relief for any other home during that period – unless any of the conditions already mentioned above apply.

So, for example, if you have owned your home for 10 years but were away from it for 2 years (20% of the time you owned the home) and the time you lived away wasn’t during the last 18 months (or any other time you might have been entitled to claim Private Residence Relief), the amount of gain (profit) you are entitled to claim tax relief on is reduced by 20% – which is the time you were away from your home.

What happens when you nominate a property as your main home?

You can nominate a property to HMRC as your main home by writing to them with the address of the home you wish to nominate. Everyone who owns the home must sign the letter – it can’t just be signed by one of the owners. You need to have lived in that home as your only or main residence at some point while you have owned it.

The main benefit of nominating a main home is that you can gain tax relief for most of the time you live away from that home. But of course, this does mean that you can’t claim relief for another property for the same period of time apart from those periods of time that always qualify for relief. The home must be nominated within 2 years, each time you change the combination of main residence. If you don’t nominate a main home and you sell one of your properties, you will need to work out how long you have lived in it as your main home to claim any tax relief you might be eligible for.

If the property is overseas, you can only nominate it if you have lived in it for at least 90 days of the tax year – this new rule came into effect on 6th April 2015.

Again, these rules only apply to UK residents.

What happens if you let out your home?

If you have let your home for any period of time you might have to pay Capital Gains Tax. This isn’t the case if you have only had a single lodger at a time – the rules are very different if you have taken in a lodger but you won’t be required to pay Capital Gains Tax, unless other circumstances also apply.

How much Capital Gains Tax you might have to pay will depend on how long you lived in the house. You will need to pay the tax on your ‘chargeable gain’ – this is your net gain (your total profit minus any deductions you can make for costs and so on) minus any Private Residence Relief you can claim. You will get full relief for the years you lived in the home as well as the last 18 months before you sold the home, regardless of whether you were living in it for that 18 months or not. If you only own one home, are disabled or in long-term residential care, you will get full relief for the last 36 months before you sold it.

The following example will explain how it all works:

You make a gain (profit) of £120,000 when you sell your home, which you owned for 10 years. You lived in it for 5 years and let out the full property for the other 5 years. So, you get Private Residence Relief for the 5 years you lived in the property as your main home. And you also get relief for the last 18 months before you sold the property even though you weren’t living in it at the time, which means that you get relief for 6.5 of the 10 years you owned the property – this equals 65% of the time you owned the property. This means you are entitled to claim Private Residence Relief for 65% of your gain meaning that you won’t have to pay any Capital Gains Tax on £78,000 of the gain. But because the remainder (35%) of your gain isn’t covered by Private Residence Relief, you will have to pay Capital Gains Tax on that remainder of your gain (£42,000).

Just to complicate matters a little, you might qualify for Letting Relief if you have a chargeable gain (the 35% remainder in our above example). If you qualify, you can claim whichever works out to be the lowest:

  • The same amount you got in Private Residence Relief.

  • £40,000.

  • The same amount as the chargeable gain you made from letting your home.

Letting Relief won’t cover any proportion of the chargeable gain you made while the property was empty – it will only apply to the periods of time you were actually letting the property to tenants.

So back to the above example:

You made a chargeable gain of £42,000 – the amount not covered by Private Residence Relief (of which you could claim £78,000). The lowest amount of Letting Relief you can claim is the £40,000 (the way it works is that you can only claim the relief amount which is the lowest). So now you only have to pay Capital Gains Tax on £2,000 of your gain.

Our experts know how complicated it can all get when you are working out your capital gains. There are other rules that might affect what you have to pay as well and if you only let out part of your home, that complicates matters even more because you will have to work out the proportion of your home you lived in to work out how much Private Residence Relief as opposed to Letting Relief you are entitled to. Expert advice can really pay off in these instances to make sure you are claiming the full tax relief you are entitled to – our friendly team are always on hand to help, so give us a call on 0330 122 9972.

How can DSR Tax Claims help?

We know that working out your Capital Gains Tax liability when selling your home can be a complicated affair, even with our helpful guide to tell you everything you might need to know. It’s all very well reading about it and knowing what HMRC’s stand on it is – but how do you apply that to your own circumstances? It can seem like an absolute minefield but help is always available and you don’t need to battle through this alone. Our team of experts at DSR Tax Claims are always on hand to help our client and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

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