The tax benefits of owning a home

    At a glance

• First time buyers are eligible for one of the biggest tax breaks for homebuyers – zero stamp duty land tax on the first £300,000 of their property value.    
• Homeowners who take a lodger can earn up to £7,500 additional income tax free annually, through the Rent a Room scheme.    
• Private residence relief makes profits from the sale of your main home exempt from capital gains tax.    
• Your property forms part of your estate for inheritance tax purposes. However, ‘nil rate’ allowances exist which will allow you to pass your home to your direct lineal descendants free of inheritance tax subject to limitations.              

Owning a home is a key milestone for many people. One that requires financial planning and preparation. However, ownership comes with additional responsibilities and costs – some of which can be avoided under certain circumstances.

This article outlines some of the tax benefits of owning a home, from tax breaks for first time buyers, relief from capital gains tax upon sale and opportunities to minimise inheritance tax on your property when the time comes to pass it down to your loved ones.

Tax relief for first time buyers

Stamp duty land tax (SDLT) is paid when you buy a residential home in England and Northern Ireland. It operates on a tiered system where different rates apply to different price bands. Progressively higher rates apply to different portions of the purchase price as you move up through the bands. 

Those purchasing property for the first time benefit from one of the biggest tax breaks available to homebuyers across the UK. Provided the property value is below a certain threshold, the first slice is completely tax free, with SDLT (or the equivalent) being charged only on the balance. For first-time buyers in England and Northern Ireland, the rates and thresholds are shown in the table below. Different rates and thresholds apply in Wales and Scotland.

If purchasing a home with someone else, both will need to be first-time buyers to be eligible for this tax relief. It is also worth noting that property interests inherited or received by way of gift will affect ‘first-time buyer’ status for the purposes of the relief.

Earn tax free income from taking a lodger

The UK government’s Rent a Room scheme allows homeowners to earn up to £7,500 per year tax free from renting furnished accommodation. If you are a joint owner, this limit is shared and split down the middle at £3,750 per person.

Some things to note if you are considering this as a way to make some additional tax-free income:

•  The room you provide must be furnished and in your main home (not an investment or separate rental property).    
•  You can’t use the scheme as a way to rent a room while you live abroad.    
•   If your income is under the £7,500 threshold, you don’t need to report it. If it’s above this level, you will need to complete a tax return.   

Tax savings when you sell your home

Capital gains tax (CGT) is charged on any profits made from the sale of a range of assets, such as shares, land, business premises and investment properties. However, there is no CGT payable on any profit made when selling your home – provided it is and always has been your main residence. This tax break for home sellers is known as private residence relief.

To qualify, the home can’t have been used for financial gain – i.e. either as a rental property or as a business premise. The property must also be less than 5,000 square metres, including the grounds.

Marcia Banner, Tax and Trusts Specialist at SJP, highlights some caveats around this benefit. She says: “If you move out of your home before selling it, the CGT relief typically only covers the period the homeowner has occupied the house as their home and the final nine months of ownership. If the period of non-occupation extends beyond this, some of the gain on sale may be subject to tax. This ensures that the tax relief is restricted to main residences only and is not available to properties being used for financial gain, such as rentals.”

There are some exceptions. For example, if you are selling a home to move into residential care, this ‘final period exemption’ is extended to 36 months.

Minimising inheritance tax when passing down your home

Any property you own is included in your estate for inheritance tax (IHT) purposes upon your death.

Where property is left to a spouse or civil partner, there is no IHT to pay, regardless of value. However, if property or other assets are passed to ‘non-exempt’ beneficiaries, such as children, grandchildren or other relatives, IHT may become payable if the value being passed to them exceeds the ‘nil rate 
band’.

The nil rate band is currently £325,000. However, it rises to £650,000 in the case of a married couple or civil partners who leave everything to the survivor on first death and only pass their estate to non-exempt beneficiaries on the second death.

If, however, the estate is below £2 million and the home is left to direct dependents, such as your children and/or grandchildren, an additional tax-free allowance of £175,000 – known as the residence nil rate band (RNRB) – may be available. As with the standard £325,000 nil rate band, both spouses are entitled to their own RNRB and it is transferable between spouses and civil partners if not fully used on first death.

Marcia explains: “Where one of a married couple or civil partners dies leaving their entire estate to the other, on second death it is possible for up to £1 million worth of assets to be passed to children free of IHT, providing the above conditions are met.”

Marcia also adds: “These rules provide an opportunity for those who aren’t homeowners but have an estate in excess of the standard nil rate band that they plan to leave to children or grandchildren.”

The rules around inheritance tax can be complex and there are other factors that could impact on eligibility. Speaking to a financial adviser may help you understand your specific situation when estate planning.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.