Your home is probably the biggest single purchase you’ll ever make – and it’s often your most valuable asset. But being a homeowner also has key tax benefits – both in the long and short term – for you and your family. In this article, we’ll look at some of the tax advantages of being a homeowner – some you may know, and some you might not be aware of.
- Owning rather than renting your own home has a number of tax benefits, both during your lifetime, and when you pass your property on.
- Under the government’s Rent-a-Room scheme, your home may also be a source of tax-free income too.
- Speaking to financial adviser or mortgage specialist could reveal tax reliefs that you may not be aware of, even if you’ve been a home owner for a long time.
- There’s no feeling like turning the key in your own front door for the first time. According to the latest figures available from the Office for National Statistics, over half of us (62.5%) are homeowners. And 7.4 million of us (29.7%) have a mortgage.1
Your home is probably the biggest single purchase you’ll ever make – and it’s often your most valuable asset.
But being a homeowner also has key tax benefits – both in the long and short term – for you and your family. In this article, we’ll look at some of the tax advantages of being a homeowner – some you may know, and some you might not be aware of.
Tax benefits for first time buyers – Stamp Duty Land Tax relief
If you’re a first time house buyer – you’ll be eligible for one of the biggest tax breaks for homeowners – first time buyers relief from Stamp Duty Land Tax, or SDLT. If you purchase your first home on or before 31 March 2025, you won’t pay SDLT on the first £425,000 of a property’s value, as long as the home you’re buying is worth less £625,000 or less. If the asking price is between £425,000 and £625,000, you’ll pay 5% SDLT. And if the house is more than £625,000, you’ll pay SDLT at the normal rate which is between 5% and 12% of the price. The 0% stamp duty threshold for first time buyers will reduce to £300,000 from 31 March 2025.
If you’re not quite at the point where you’re ready to buy, but want to own your own home in the future, opening a Lifetime ISA is a tax-efficient way to save up for a house deposit. You can put in up to £4,000 each year tax-free, until you reach 50.
And there’s an added bonus – a 25% cash boost from the government, up to a maximum of £1,000 per year.
You must be 18 or over (but under 40) to open a Lifetime ISA, but the longer you save, the more your money will benefit from compound interest.
Could your home be a source of tax-free income?
The recent cost-of-living crisis and continuing high prices mean that most households still need to keep a close eye on their budgeting. Often, our first impulse is to look at where we can save money. We might even consider downsizing to somewhere smaller and cheaper to run.
But many homeowners are considering renting out a furnished room in their main property – either as an occasional air bnb, bed and breakfast, or as a longer term let to a lodger. Taking advantage of the government’s Rent-A-Room scheme, provide a significant tax benefit. “People don’t seem to use, or even be aware of, the Rent-a-Room scheme,” says Paul Johnson, SJP’s Head of Mortgages. “Not only might you qualify for up to £7,500 tax free income from renting a furnished room in your home, but some mortgage lenders will also accept it as an income. In general it’s a little-known – and under-utilised – tax break. “
Be aware that the tax allowance is halved to £3,750, if you share the income with your partner or a joint owner.
Do you pay CGT if you sell a property?
If you sell your main residence, you won’t pay Capital Gains Tax (CGT), even if it’s increased in value since you bought. This is due to the existence of a relief called Principal Private Residence Relief, or PRR relief. If you’ve lived in your house for a long time, this relief can save you a significant amount of tax.
If however, you’re selling a second property or a buy-to-let, you may be liable to pay CGT on any gain at 18% – or 24% if you’re a higher or additional taxpayer.
In a nutshell, if you move ‘main’ to ‘main’, there’s ‘no gain’.
Downsizing your main residence can be a tax-smart move
Most downsizers are in their mid-sixties, but many people moving house are downsizing for a whole variety of reasons, including divorce, a bereavement or simply to reduce running costs once the family have left the nest.
Whatever the reason, downsizing from a property may mean you release equity in the form of a large lump sum – which is tax-free, because you’re selling your main residence.
Deciding what best to do with that tax-free lump sum is a nice problem to have. You’ll have a number of options, including investing it into your pension fund (subject to conditions), or into a Cash or Stocks and Shares ISA (up to the annual subscription allowance), or even gifting some of it to other family members as an ‘early inheritance.’
Taking financial advice ahead of the sale means that the money can start working hard for you, from the moment you complete.
Will your home be liable for Inheritance Tax?
Currently, if you leave your home or former home directly to your children, grandchildren or stepchildren, your estate (if below £2m) will benefit from the Residence Nil Rate Band (RNRB) which is an additional tax-free allowance of up to £175,000.
That, coupled with the current £325,000 Nil Rate Band allowance, means that a good proportion of your lifetime’s wealth could pass to your family without them paying 40% Inheritance Tax on it.
Could downsizing, gifting or selling my house affect my RNIB?
Downsizing is often a huge positive as we get older, and don’t need the expense or the worry of maintaining a bigger house or garden. But there is a possibility that you could lose out on the Residents Nil Rate Band if you downsize.
If that is the case however, you may be able to claim the Downsizing Addition. This is a compensatory tax relief which can ‘make up the difference’ if you downsize to a less valuable home before you die. Your family may still also qualify for the additional tax relief where you have sold or gifted your property prior to your death, subject to certain conditions..
It’s important to take financial advice if you think that you may qualify for downsizing addition, as the rules are quite complex.
More than bricks and mortar
Being a homeowner is about more than tax breaks. After all, we invest time, money, love and often years of our lives in our homes. But it’s always important to protect and maximise the benefits your greatest asset can bring.
We’re here to help you with practical advice and support on home ownership and taxes. If you’ve a question, we’d be happy to help. Get in touch with us today.
Read the story of 27-year old Daniel Beddoes, who with the support of his financial adviser, bought his first home – and is still hoping to have the chance to retire early.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Please note that St. James’s Place do not offer Lifetime or Cash ISAs.
Sources
1Office of National Statistics, 2021 Census quoted in 2023 ONS news release.
Written by St. James’s Place. Sonny Kurmi of S K Wealth Solutions is a member of The Local View Cambridge.
