Selling upgraded 2nd property

[markhellard@hotmail.]

I am considering buying a second property with a colleague with the intention of upgrading it (possible extension etc) and then selling it. Would my/our CGT liability be calculated on only the profit after purchase costs (including stamp duty, legal costs) and upgrade costs (planning applications, building cost etc) and then selling costs (estate agent fees etc)?

Putting some hypothetical figures on it:
Cost of house £96,000
Total purchase cost including stamp duty and legal fees £100,000.
Cost of upgrade £30,000.
Sale price £156,000.
Total sale price including estate agent £160,000.

What would the CGT on such a transaction be?

Taking it a stage further, is it prudent for us to form a company and complete the whole deal via the company name?

Depending on the success of such a venture, we may wish to continue to do this once each property is sold; does that have any bearing on the CGT/corporate tax/income tax issues?

We are both married with a main residence and intend to fund this venture by re-mortgaging to realise the equity.

Any advice would be most welcome.

[Nigel Lord]

Mark

If you undertake property development as a trade (and your stated intention to undertake a series of such transactions suggest that this is the case) then you will be liable to Income Tax not Capital Gains tax on the profits. In addition, the fact that you intend to sell property one on completion of the renovation suggests that you will be trading as a developer.

Accordingly, it may be appropriate to establish a Limited Company to undertake the development of this and future properties.

Using a company would cap the tax rate at Corporation Tax rates (0-30%) rather than personal rates (to £40%). Based on the figures reflected above, the net profit of £26,000 would be taxed at an effective rate of 14.62%. This could be further improved upon by using a tax efficient share structure and remuneration policy to utilise all your respective family entitlements to allowances and lower income tax rates.

The corporate structure may also have VAT advantages.

There are disadvanatages to incorporation (reporting requirements, costs etc.). Professional advice should be sought in advance of taking any action.

My firm specialises in this area of taxation. If you would like us to assist you further we would be delighted to do so.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk