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How to avoid property sale proceeds from getting hit from savings account tax

Journalist: Kate Steiner-Dicks, Freelance

ended 07. February 2025

  1. Just how much could you lose to savings account tax when the proceeds of a house sale are in your savings account? 2) Is there a way to preserve as much of your savings while looking for a new property? 

Here’s the scenario: You’ve sold your primary residence and are holding the proceeds (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. What tax-efficient strategies can people especially freelancers use to preserve as much of this capital as possible for their future home purchase, minimising the impact of income tax on the interest earned while the funds are held in savings? Specifically, are there any specific savings vehicles, investment options, or tax wrappers that are particularly suitable for this scenario, considering the relatively short-term nature of the savings goal (i.e., purchasing a new home within a reasonable timeframe) and the freelancers' diverse income streams (self-employment, limited company dividends, PAYE income, etc.)? What are the key considerations and potential pitfalls freelancers should be aware of when making these decisions?"

2 responses from the Newspage community

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Editor
Dariusz Karpowicz
Director at Albion Financial Advice
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. With current rates hovering around 4-5%, significant sums in savings accounts could generate considerable interest income, potentially pushing you into higher tax brackets and eroding your house deposit funds through unexpected tax liabilities.
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.
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Editor
Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
Premium bonds and cash ISAs offer a shelter from income tax on anything earnt from the savings deposited in there.

However it's worth working out the likely actual interest that will be taxable.

Basic rate taxpayers can earn £1000, and higher rate taxpayers £500 in interest tax free, each year.

There's also a 0% savings income tax band some people can benefit from.

FSCS protection is also something to be mindful of. This protects the money in the event a bank goes bust. The usual limit if £85k per person, per banking group.

However there are provisions for temporarily high balances of upto £1m following certain events, like a house sale. But, it important to check if your particular situation would qualify for this.