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Last Updated: Sunday, 6 May 2007, 13:23 GMT 14:23 UK
How to avoid capital gains tax
An eco-house
To avoid capital gains tax you need to have lived in the house you sell

As property prices have risen sharply in recent years, there has been money to be made in buying and selling homes.

Here Russell Lawson of the Federation of Small Busineses Wales looks at how would-be property developers can avoid having to pay capital gains tax.

Lee Roberts, Wales
My wife and I are going to self build an eco-friendly house, live in it for a year, and then sell it for a profit.

Would we be subject to capital gains tax?

We also aim to buy some small cottages, which we will renovate and use as holiday lets.

Whilst these plans are in motion, do you have any recommendations on how best to obtain working capital, as obviously mortgages will still have to be paid?

Russell Lawson, Federation of Small Businesses Wales
You will not have to pay capital gains tax when you dispose of your home if all the following conditions are met:

  • Throughout the period that you owned it, it was your only home.
  • You did actually use it as your home all the time that you owned it.
  • Throughout the period that you owned it, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger.
  • The house and garden do not exceed 5,000 square metres (about one and a quarter acres - roughly the size of a football pitch).
  • Yet the rules in this area are still quite hazy.

    The Inland Revenue will usually like you to live somewhere for about two years, but this is not set in stone.

    If you keep buying somewhere, renovating it, then selling it on after a year, the Revenue might view this as a business, so you have to tread carefully.

    The problem with doing what you are doing is that, as you say, mortgages will have to be paid while you are working on the property.

    What you could do is renovate a few rooms early on - a bedroom, bathroom and kitchen - then let out the furnished rooms in your home, for which you can receive up to 4,250 a year tax-free.

    This is known as the Rent a Room scheme, and is an optional exemption scheme that lets you receive a certain amount of tax-free "gross" income (receipts before expenses) from renting furnished accommodation in your only or main home.

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