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Where Taxpayers and Advisers Meet

CGT or Income Tax or Nothing?

Noggins
Posts:3
Joined:Thu Sep 08, 2016 4:42 pm
CGT or Income Tax or Nothing?

Postby Noggins » Thu Sep 08, 2016 4:44 pm

I’m thinking of going into buying and selling property on a part time basis but want to understand some basics before I go any further. I have previously renovated 3 properties in the past 4 years but have never had to worry about tax as I have lived in them. I’m looking at buying a second property to buy and sell but not live in it (due to twins on the way!), hence the tax advice.

The first situation I have thought of is if me and my partner sold our current house and she brought a property in her name and I brought another in my name would I be able to claim PPR or would HMRC click on if I’m moving every 4 months?

The second more straight situation is if I go self-employed. I believe if I buy the property, rent it for 6 to 12 months and then sell it I would have to pay CGT? Whereas if I buy and then sell straight away its classed as a trade and therefore income tax is applicable?

If I have to pay CGT am I able to offset any non-capital expenditure against the rental income or not as the work will be carried out before being rented?

If I have to pay Income Tax can I claim all renovation expenditure?

Thanks in advance!

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: CGT or Income Tax or Nothing?

Postby Lambs » Thu Sep 08, 2016 5:23 pm

N,

I am not sure why you think that you have never had to worry about tax if you have lived in 3 properties in the space of 4 years. (I am assuming you have bought them, improved them, and then sold them on, since that is the main thrust of your e-mail). Simply put, just because you haven't reported taxable transactions doesn't mean that they are nothing to worry about. (To be clear, I am not saying that the transactions are taxable. I just do not share your confidence that they are not).

Would they qualify as your main residence - was your quality of occupation sufficient? What caused you to sell the properties and move on?
Would eligibility for PPR be denied on the basis that you acquired the properties with the intention of making a gain on them?
Could HMRC argue that you are in fact trading as a property developer, and that the profits/gains on sale of the properties should more properly be considered trading profits?

I hope for your sake that you have sought advice on these transactions. Then again, perhaps there is little money at stake. It will depend on the circumstances and the extent of the profits/gains, if any.

Regards,

Lambs

Noggins
Posts:3
Joined:Thu Sep 08, 2016 4:42 pm

Re: CGT or Income Tax or Nothing?

Postby Noggins » Fri Sep 09, 2016 1:40 pm

Hi Lambs,

You are correct, the past 3 houses we have brought and lived in were in an awful state. We renovated them all and then moved onto the next one as it would be in a better location etc. We made 20%, 14% net profit on the first and second respectively and looking to make a 23%+ net profit on the third. Tax has never come into it as we have claimed PPR relief being we lived there for a minimum of 12 months, mail was directed there and both had full time occupation.

So looking back at my original question...

If we buy a second property with the intention 'making money', renovate and sell it that would be classed as trading profits and income tax would be due at the relevant rates? And all expenses would be deducted from the sales price to reach my income?

Whereas if we ended up renting the finished product and then selling it at a later date it would be CGT? Could we offset any of the expenses that wouldn't be allowed for CGT against anything?

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: CGT or Income Tax or Nothing?

Postby Lambs » Fri Sep 09, 2016 1:53 pm

N, I am not convinced you are eligible for PPR based on the limited information you have provided. (I am not asking for more). I should recommend you speak to a suitably qualified adviser about the properties you have already processed before committing to further developments. To be clear, I am not saying you are ineligible just that I am not sure you definitely are.

Regards,

Lambs

Noggins
Posts:3
Joined:Thu Sep 08, 2016 4:42 pm

Re: CGT or Income Tax or Nothing?

Postby Noggins » Fri Sep 09, 2016 2:46 pm

Are you able to advise me on going forward though?

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: CGT or Income Tax or Nothing?

Postby Lambs » Sat Sep 10, 2016 7:40 pm

Yes.

My advice, for what it is worth, is as follows.

Tax is basically self-assessed in the UK. Failing to deal with that issue does not mean that tax is not due. And if you are failing to account for any tax that may be due on the sale of the properties that you have already acquired and sold, you are potentially liable to interest and penalties (and possibly worse).

PPR is not intended to, and does not, act as an "exemption" from paying tax where you acquire a property with the intention of turning it over at a profit. I note that your question includes the %age profit you have made on each property in the last few years. The PPR regime does not have a 12 month rule. There is a difference between acquiring a home with the hope that you will make a gain when you eventually sell, and a firm intention to make a gain on a property as soon as renovations are complete.

If you are intending to buy property in order to make a gain or profit, then you will not be eligible for PPR. At the rate of transactions you are contemplating, my opinion is that you are (and quite possibly already have been) trading. It may or may not be the right word to use depending on the circumstances and your intention but, simply put, "hiding" a trading intention behind short-term occupation or letting out does not stop it from being a trading asset, exposed to Income Tax and NICs, if you intend to "do up" and then sell for a profit, when you buy a property. I am not comfortable that you have understood this important point.

It is not a question of whether or not "HMRC will click on" if you are moving every 4 months. Perhaps I have misunderstood the thrust of your question. A little tongue-in-cheek, perhaps, but that risks being perceived as a little like asking your lawyer if you should keep the engine running while you hold up a bank.

With regards,

Lambs


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