Self-builders could find themselves unexpectedly out of pocket when they come to sell their property due to an often-overlooked Capital Gains Tax rule.

Imogen Lea, a private client practitioner and chartered tax advisor, warns that people who are building their own home could end up paying more than they think unless they move in within 12 months.

“The popularity of TV programmes such as Grand Designs are encouraging more and more of us to build our own homes,” said Imogen, a consultant at Clarke Willmott LLP.

“Most home buyers qualify for principal private residence (PPR) relief in full and so are effectively exempt from CGT which can be levied on profit from the sale of the property.

“However, unless you move in and make it your main residence within the first 12 months, 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.”

For example, if someone purchased a plot of land in 2014, started building in 2015, moved in in 2016 and then sold the property in 2020, they will have owned the property for six years.

However, the relief will only be available for the four-year period they lived in the property.

As self-builds can provide a market value above the spend value, this can result in CGT being due.

“Self-builds can be fraught with delays due to planning permission, availability of materials, recruiting builders, or issues with the land, so a year can easily slip by,” added Imogen.

“To mitigate against any CGT costs on disposal, self-builders and doer-uppers should move in if the property is habitable – making sure their mail goes there and they make council tax payments – even if it is not fully completed.

“If people 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.”

“Further, serial house builders or doer-uppers can enter into the income tax arena rather than CGT,” says Imogen, “and income tax tends to be at higher rates than CGT”.

Imogen  is a consultant in Clarke Willmott’s Private Capital team in specialising in private client matters and is a chartered tax advisor.

Clarke Willmott LLP is a national law firm with seven offices across the country.