Building a home rather than buying a completed property can offer significant tax advantages and wealth planning opportunities. Some of the main financial benefits include Stamp Duty Land Tax (SDLT), savings on construction costs and Capital Gains Tax (CGT) reliefs for main residences. If you’re considering building your own house, we look at what you need to know, including strategic timings for property transactions.
Land purchase vs completed property
One of our clients bought a plot of land for £200k and built a house worth £520k. When you build a home, Stamp Duty Land Tax (SDLT) is only charged on the land purchase and not on the cost of construction. Therefore, this creates immediate tax savings when compared to buying a completed property.
Land without a dwelling is classed as ‘Non-residential Property’. The SDLT rate for purchasing freehold land between £150,001 to £250,000 is currently 2%. Our clients paid £1,000 on the £200k land value instead of the £520k completed property value.
If our client had purchased a £520k property, this would have incurred £15,500 in SDLT (0% on first £125,000, 2% on the next £125,000, and 5% on the remaining £270,000). Therefore, this represents a potential saving of £14,500 throughout the build.
Second property and main residence Stamp Duty
When purchasing a completed property, while having ownership of another property, there is an additional second property rate of SDLT. In the Autumn Budget 2024, this increased to 5% of the property value up to £250,000 and 10% between £250,001 and £925,000. These higher rates were aimed at disincentivising people from buying second homes and buy-to-let properties.
However, in some instances, this additional SDLT charge can be avoided or refunded when you’re replacing a main residence. If the new property will eventually replace your home, and your previous main residence is sold within 3 years, you can claim a refund.
Capital Gains Tax implications
Principal Private Residence Relief
When you sell your home, there’s no Capital Gains Tax (CGT) liability on the disposal of a main residence due to Principal Private Residence Relief. This relief applies when the property has been the owner’s only or main residence throughout the ownership period. However, if you chose to keep two properties in tandem this could become complicated.
Under Principal Private Residence Relief, there needs to be no periods of absence other than allowed absences. Also, no part of the property should have been used exclusively for business purposes. This relief also includes gardens and grounds up to a permitted area. It can make building and eventually selling your home tax-efficient from a CGT perspective.
Gifting land or property
When gifting land or property, CGT varies significantly from sales transactions. Gifts are treated as disposals at the market value, which means that gifting a property or land to your children could trigger a CGT liability. The taxable amount would be based on the market value at the time of the transfer, even if no cash is received.
If you are considering gifting property, timing is crucial for CGT planning. The market value rule means that any accrued gains from the original purchase price to the gift date become immediately chargeable. Therefore, without careful planning, this could create tax liabilities.
Strategic planning, IHT and pensions
When you are building a house, the construction phase can offer valuable strategic planning opportunities, especially in terms of the mortgage and liquidity management. There could also be potential savings or capital growth depending on your timing and market conditions.
Unlike when you purchase a completed property, staged payments during the build period allow better cash flow management and can also reduce your borrowing costs. You might be able to use this flexibility to support other investments during the construction phase.
From an inheritance tax (IHT) perspective, property development can help to support your legacy planning. Gifting properties to children under the seven-year rule can enable you to utilise available tax exemptions.
However, it’s always worth noting that construction projects come with risks. Costs can overrun and escalate due to market volatility in materials and labour, which in turn can erode financial benefits. Valuation challenges might also arise, particularly when you’re gifting part-completed properties – this would require accurate HMRC assessments for tax compliance.
If you’re using a Self-Invested Personal Pension (SIPP) to build a property, then members will have less control over construction decisions and timings. The pension scheme trustees would make all property-related decisions. Also, if there are any challenges with the construction, this could result in fewer potential pension tax advantages.
Wealth and Retirement Planning, Nottingham
When it comes to building your own home, it’s important to factor in timings and tax-efficient financial planning strategies. Careful consideration is needed for construction risks and various tax liabilities if you want to preserve your wealth and financial security.
Before you commit to a large purchase of land or property, speak to our financial planners, especially if this is part of your retirement or legacy strategy. At Balance: Wealth Planning, we have a joined-up approach to financial, tax, and lifestyle planning. Our team will help you assess your property investment, and we can provide a sensible financial planning strategy.
Before you make any big decisions on a property or house build, ask our financial planners to review your financial plan. Get in touch with our team today.
Sources:
https://www.ukpropertyaccountants.co.uk/stamp-duty-land-tax-sdlt/
https://www.cheltenhamsolicitors.co.uk/news/property/2025-stamp-duty-changes-second-home-buyers/
https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm04010
