Capital gains tax, inheritance tax and your home | SavvyWoman

Capital gains tax, inheritance tax and your home – understanding the basics

Font size


If you sell your home and you make a profit, you won’t generally have to pay tax on it. But it’s different if you own more than one property.  So what taxes might you have to pay and are there any tax breaks you can make use of?

Capital gains tax

You don’t have to pay capital gains tax when you sell your home if it’s your main – or only – home. But you might unwittingly store up a capital gains tax bill if you work from home, by:

1. Using a room as a home office. If you work from home and use your spare bedroom as your office, it’s fine if you also use the room for other ‘non business’ things (such as having friends to stay or storing clutter). However, there could be a problem if you tell HM Revenue & Customs that you only use one or more rooms in your home for your business.

2. Running a business from your home. If your home incorporates a shop front and storeroom or an area where you only see clients, you may have to pay capital gains tax on the proportion that’s strictly business use.

SAVVY TIP: If you sell a property that does come under the capital gains tax rules, you’ll pay a higher rate of capital gains tax than if you were to sell other assets, such as shares. These rates are 18% and 28%.

Rent a room scheme

For once, not a tax bill, but a tax saving. You can rent out a room in your home and not pay tax on the rent you receive, as long as it’s less than £7,500 a year (or £625 a month). If you own your home jointly, you can only claim half the rent a room allowance each.

  • You can rent out more than one room. Although the scheme is called ‘rent a room’, you can rent out more than one room to a lodger, but you can’t use it if your property is divided into self-contained flats or if you rent a room or rooms unfurnished.
  • There are pros and cons to the rent-a-room scheme. The advantage of the rent-a-room scheme is obvious — you don’t have to pay tax on your rent, but the disadvantage is that you can’t claim any of the normal expenses that go with renting out part of your property (such as a proportion of your mortgage interest, electricity, heating or insurance).

You can use the scheme even if you receive more than the upper limit in rent. If you receive more than £7,500 a year in rent and rental services (such as laundry, meals etc), you will have to pay tax on the difference.

There’s more information on the rent a room rules at the government’s website.

SAVVY TIP: If you want to opt into the rent a room scheme, you don’t have to do anything if you receive less than £7,500 in rent. If it’s more than that, you should tell your tax office so you can pay tax on the difference.

Stamp duty

You have to pay stamp duty land tax (SDLT) at 3% above the standard rate (in Scotland it’s called the land and buildings tax), if you sell a second property. The rules on how this works are quite complicated, but I’ve explained them in my article called Stamp duty is increasing from April if you have a second property. How will it work?

Inheritance tax

There’s one tax that can be hard to avoid if you own property, and that’s inheritance tax.

1. When you die, any property you own forms part of your estate.

2. Unless everything you own is worth less than the inheritance tax threshold, which is £325,000 a year in the tax year 2019-20, your estate could face a bill of 40% on your estate above that level.

3. There are exceptions: you can leave your half of your home to your husband or civil partner and they won’t have to pay a penny in inheritance tax.

SAVVY TIP: The inheritance tax threshold is due to rise to £1 million by 2020 for married couples, but only if they pass on their main home.  The increase is due to be phased in from April 2017. There’s more about inheritance tax and your own home on the website.

Useful links:

There’s more about tax when you sell your own home on the website.

Related articles:

You can earn up to £7,500 a year tax free using the rent-a-room scheme and take in a lodger

Can you really make money by renting out a room, your drive or using y our property as a film location?

How to challenge your council tax band and get your council tax band reduced

SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.