In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk.
Question: I am looking to sell my house. What tax will I have to pay when I sell? I have no mortgage.
Answer: For most people, the starting answer is reassuringly simple: if this is your main home, you will usually have no tax to pay at all.
In the UK, your main residence is normally covered by what is called private residence relief. If you have lived in the property as your main home for the whole time you have owned it, the gain you make when you sell is exempt from capital gains tax, no matter how much the property has risen in value. In that case, the fact that you have no mortgage is irrelevant from a tax point of view. The mortgage affects what you walk away with in cash, not the tax you pay.
Things become more complicated if the property has not always been your main residence. If it was ever a second home, a buy-to-let or a property you lived in only for part of the time, then capital gains tax may come into play. The gain is broadly the difference between what you paid for the property and what you sell it for, after deducting certain costs such as legal fees and improvements. Private residence relief may still reduce the bill if you lived there for part of the time, but it may not eliminate it entirely.
Married couples and civil partners need to be particularly careful here. Between them, they can only ever have one main residence for tax purposes at any one time. If you own more than one property, you are allowed to choose which one counts as your main home, but you have to make that decision consciously.
There is a formal election that can be made to HMRC, and it must normally be done within two years of having more than one residence. Choosing the right property to live in can make a big difference to the eventual tax bill when one of them is sold.
If the property you are selling does not qualify as your main residence and capital gains tax is due, there is another important change people often miss. You no longer wait until your annual tax return to deal with it.
Since April 2020, any capital gains tax due on the sale of a UK residential property has to be reported to HMRC and paid within 60 days of completion. This deadline was originally 30 days and was later extended to 60, but it is still a much tighter timetable than many people expect. Miss it, and penalties and interest can apply.
It is also worth clearing up a common point of confusion. Stamp duty is not paid when you sell a property. It is paid by the buyer. However, if you are selling one home and buying another, stamp duty on the new purchase becomes part of the overall picture. Which property you treat as your main residence, and the timing of selling and buying, can affect whether higher stamp duty rates apply on the new home. This is another reason why it pays to think about the sequence of transactions rather than looking at each one in isolation.
The good news is that for the vast majority of people selling the home they live in, the process is straightforward and tax-free. Problems tend to arise only where a property has had more than one role, or where people assume the rules are the same as they were years ago.
If there is any doubt about whether a property qualifies as your main residence, or if you are juggling more than one home, it is well worth getting advice before you complete the sale. A short conversation at the right time can save a nasty surprise later, and give you peace of mind that you have done everything properly.