A House in Multiple Occupation (HMO) is a residential property let to three or more tenants from different households sharing facilities. Converting a standard property to an HMO involves building work, licensing, and ongoing management. When you sell, all of this affects the CGT calculation. For the general rules on which property costs reduce a gain, see our guide to allowable costs vs repairs.
The gain on an HMO sale
The CGT gain is calculated in the usual way: disposal proceeds minus the original purchase price and allowable costs. For an HMO, the allowable costs section is often more substantial than for a simple buy-to-let because of the conversion work.
What conversion costs are allowable
Capital expenditure on converting a property to an HMO is potentially allowable as an enhancement cost. This includes:
- Installation of additional bathrooms, kitchens, or utility rooms to create separate facilities
- Construction of internal walls or structural alterations to create self-contained rooms
- Fire safety improvements required for HMO licensing, such as fire doors, smoke detection systems, and emergency lighting
- Extensions to increase the number of lettable rooms
The key distinction is between capital improvements (allowable) and revenue repairs (not allowable). Replacing a broken fire door like-for-like is a repair. Installing a fire door system where none existed before is capital expenditure.
Some work falls in a grey area: rewiring an old property to modern standards may be partly an improvement and partly maintenance of what was already there. A Chartered Accountant/Chartered Tax Advisor will need to review the invoices and the nature of the work.
HMO licensing costs
Local authority HMO licensing fees are revenue expenses deductible against rental income. They are not allowable as a CGT cost. If you paid £1,000 for an HMO licence, that reduces your income tax bill, not your CGT bill.
PRR and an HMO
PRR applies to a property that was your only or main residence during your ownership. An HMO let to multiple tenants is not your main residence during the letting period, even if you own the property.
If you lived in the property before converting it to an HMO, the periods of occupation as your main home qualify for PRR in the usual way. After conversion, no further PRR accrues unless you move back in. For more on the PRR calculation and how it applies to a property that was once a home and later let, see our guide to CGT when you sell an ex-rental property.
There is a nuance for HMOs where the owner also lives on the premises. If you occupy one room or unit in an HMO as your main residence while letting the rest, you may be able to claim PRR for the part you occupy. The calculation apportions the gain between the part you occupied and the part let. This requires a detailed analysis of the floor area or number of rooms occupied versus let.
The 60-day return
An HMO is a residential property for CGT purposes. The 60-day return requirement applies to any disposal where a chargeable gain arises. There is no exemption or different treatment for HMOs compared to standard buy-to-let properties.
The Article 4 direction issue
Some properties were converted to HMOs before a local Article 4 direction restricted further HMO use. If an Article 4 direction removes the right to operate an HMO on a property, the value of the property in its restricted use may be lower than its value as a continuing HMO. This has CGT implications if the property is sold at a price affected by the restriction.
What LetsFile checks
For an HMO sale, we ask for a breakdown of the capital expenditure on the original conversion and any subsequent capital works. This typically requires going back through contractor invoices and building regulations approvals. The documentation is more work than a standard buy-to-let but the allowable costs are often significantly larger, making the process worthwhile.