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When Your Private Residence Is Not Exempt From Tax
It is generally assumed that any property that you live in as your primary residence will not be subject to a tax on any profit on sale, assuming you own no other properties that have been designated as your primary residence.
However, there are circumstances in which tax can arise on the profit on sale of a property in which you live.
The first circumstance is when the property was acquired in order to be sold at a profit as part of a trade. HM Revenue and Customs (HMRC) will mainly seek to assert this if your property transactions bear the 'badges of trade' and occur on more than one occasion or the period between purchase and sale is short. If HMRC are successful in this approach, the profit will be subject to Income Tax.
If a property profit becomes taxable to Income Tax, normal trading deductions (such as loan interest for the purchase of the property) will apply.
The second issue which can cause problems is if HMRC take the view that the profit on sale of the property should be subject to Capital Gains Tax (CGT), because it has been acquired as a capital asset to be held with a view to a later disposal at a profit. This is very unlikely, however, as HMRC will normally seek to charge the profit to Income Tax, not CGT. HMRC can only charge the transaction to one or the other tax.
The third possibility is when the property has had periods of use as a private residence but also periods when it was not so used – for example, when it was let out – or when part of the property is used for business purposes – for example when an extension is built which is then used as office space. In such circumstances, the tax situation can become complicated to ascertain.
The taxation of residential property sales is sometimes far from straightforward and there are several potential pitfalls. Fortunately, most of these can be avoided, or the tax effects minimised, with the benefit of careful planning.