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Capital Gains Warning for Self-Builders

Capital Gains Warning for Self-Builders

Building your own home could cost more than you think unless you move in within 12-months, writes legal property specialist Imogen Lea of Clarke Willmott.

The popularity of TV programmes such as Grand Designs are encouraging more and more of us to build our own homes, yet some people are finding themselves unexpectedly out of pocket when they come to sell the property.

Most homebuyers qualify for Principal Private Residence (PPR) relief in full and so are effectively exempt from Capital Gains Tax (CGT), which can be levied on profit from the sale of the property. However, unless you move into the property and make it your main residence within the first 12 months, HM Revenue & Customs (HMRC) can impose demands for CGT when you eventually come to dispose of the house. This could mean paying 28% CGT on part of your occupation if you fail to move in within a year of acquiring the plot (or two years in exceptional circumstances).

As we all know, self-build can be fraught with delays due to planning permission, availability of materials, recruiting of builders, availability of labour, or issues with the land that may not have been picked up on a survey. For example, if you buy a plot of land in 2014, start building in 2015, move in 2016 and then sell the property in 2020, you have owned the property for six years but PPR relief will only be available for the four-year period you lived in the property. As self-builds can provide a market value above the spend value this can result in CGT being due. 

To mitigate against any CGT costs on disposal, self-builders and doer-uppers should move in if it the property is habitable – making sure their mail goes there and they make council tax payments – even if it is not fully completed. However, if you do overrun – and a significant proportion do – if you have lived in the house for several years, it is likely that any CGT will be reasonably minimal because so much residence time will have built up. However, if there is a reasonably quick sale, then there is more likely to be an issue. Serial house builders or do-er uppers, can enter into the income tax arena rather than CGT, though income tax tends to be at higher rates than CGT.

As someone who lives in a very unique self-build (albeit not by me) home, I still marvel at the skill and creative ideas used throughout and indeed still come across genuinely lovely touches. And although building your own bespoke home can be fabulous thing to do, it may well be a lot harder than you think and you should always expect the unexpected and research thoroughly.

Imogen Lea

Imogen Lea is a consultant in Clarke Willmott’s Private Capital team in Taunton specialising in private client matters and is a chartered tax advisor. To contact Imogen call 0345 209 1538 or email imogen.lea@clarkewillmott.com

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