Maximise your house sale: beat the taxman

Selling a house? Keep more of your money with these tax-saving tips for your next home purchase

Here’s the scenario: You’ve sold your primary residence and are holding the proceeds/equity you earned (often a substantial sum between £100,000 and £500,000 or more) in a savings account while searching for your next home. Given the current interest rate environment, the interest earned on this money could be significant, potentially leading to a substantial tax burden.

The typical property rose in value by 0.7pc in January to an average of £299,138, according to the Halifax house price index, so many people could be expecting to gain more equity in their homes this year if the trend continues.

So, what’s the problem?

The Labour government and the HMRC or tax arm have access to how much interest you earn on your savings each year. That’s so they can tax you after certain savings thresholds have been exceeded and based on your tax bracket.

With interest rates now at 4.5%, a substantial sum from a house sale (often between £100,000 and £500,000 or more) can generate considerable interest income. This could push individuals, especially freelancers with fluctuating earnings, into higher tax brackets, unexpectedly diminishing their capital. The question then becomes: what tax-efficient strategies can be used to minimise the impact of income tax on this interest while the funds are held in savings, particularly given the relatively short-term nature of the savings goal?  

How can you pay less tax on your savings?

Dariusz Karpowicz, Director at Albion Financial Advice offers some options. Karpowicz told The Freelance Informer via the NewsPage Agency:

“Holding substantial proceeds from a property sale in today’s high-interest environment presents both an opportunity and a potential tax consideration that requires careful planning…Fortunately, the UK tax system offers several strategic options to manage this situation effectively.”

By utilizing a combination of Cash ISAs (with their £20,000 annual tax-free allowance), considering Premium Bonds for larger sums, and potentially splitting funds between spouses to maximize Personal Savings Allowances, you can maintain ready access to your capital while minimizing tax exposure.

The key is to structure your savings appropriately while ensuring funds remain accessible for your property purchase timeline.

–Dariusz Karpowicz, Director at Albion Financial Advice

Karpowicz is not alone in his thinking. Ross Lacey, Director & Independent Financial Adviser at Fairview Financial Management, points to Premium Bonds and Cash ISAs as offering shelter from income tax on savings. He also advises calculating the likely taxable interest.

“Basic rate taxpayers can earn £1,000, and higher rate taxpayers £500 in interest tax-free, each year,” he explains. “There’s also a 0% savings income tax band some people can benefit from.”

Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance, according to HMRC.

However, Lacey also flags the importance of Financial Services Compensation Scheme (FSCS) protection, which safeguards deposits up to £85,000 per person, per banking group [some groups such as Lloyds and Halifax are linked so be aware of this].

He adds, however, that there are provisions for temporarily high balances of up to £1m following certain events, like a house sale, but urges you to get advice on this as individual circumstances will determine eligibility.

“It’s worth working out the likely actual interest that will be taxable,” he says. “FSCS protection is also something to be mindful of…it’s important to check if your particular situation would qualify for this.”  

Keep tabs on everything you earn

Freelancing can mean juggling lots of different income streams. That could include what you earn yourself, dividends from your company, and maybe even some PAYE income too. This makes things a bit tricky, especially when it comes to tax because you may not know which bracket you’ll land in. That’s why planning ahead could save you a lot of money that could go towards future legal fees, for example. And always ensure your mortgage redemption statement is correctly calculated and take into account early redemption charges.

You need to work out all your income for the year and then figure out the smartest way to use allowances and tax-free savings to keep as much of your money as possible.

Your allowance applies to interest from:

• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts

Final thoughts

While high interest rates are great for growing the money from your house sale, they also mean you could end up with a big tax bill. To keep as much of that money as possible and still have it handy for your next place, think about putting some of it in Cash ISAs or Premium Bonds before you sell. And if you’re a freelancer, definitely look into using your spouse’s allowances too. That can boost your tax-free savings.

But everyone’s situation is different, so it’s really important to get some proper financial advice. That way you can make sure you’re doing the right thing and avoid any nasty tax surprises that could mess up your plans for a new home.

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