Property bought for development but now decided to let out

[stellad]

Hi, Please could you help with some advice regarding tax implications for a house we bought last autumn. Originally my other half and I thought we would develop and sell straight away. We registered as a property development partnership with HMRC because at that time we planned to do maybe 2 such properties a year and knew this would be classed as trading rather than investment. However, we have now decided to keep the house as an investment and rent it out for at least 2 years, and have no plans to buy and renovate any others.

Should we inform HMRC that our property development partnership is at an end? Also, will the fact that we originally had in mind to go into property development mean that we will be obliged to pay income tax rather than CGT when we eventually come to sell it (even though we've never earned a penny as developers)?

I don't know if it makes any difference but my partner and I aren't married.

Thanks for any advice
Stella

[mullet]

Have a read of Lionel Simmons Properties Ltd. A quote from that case: Trading requires an intention to trade: normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment?

And another: Intentions may be changed. What was first an investment may be put into the trading stock – and, I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company’s accounts, and, possibly, a liability to tax.

So whilst you have not had any income from trading, can you really say that you never traded? Did you simply hold the asset and then change your mind? Or did you acquire and then enhance an asset which you later decided to hold in the manner of an investment? The difference between you and the Simmons case is that as a partnership you are not a separate legal person (unless you are a Scottish partnership). So can you make a transfer to yourselves? Or do you ignore the "transfer"?

Sorry that I have posed so many questions, but I don't think that it is simply a case of saying that you never traded on the basis that you didn't sell anything.

[Incredulum]

IF you were a trading partnership and the item has been transferred from stock to investment stock then the income tax is due based on the profit having arisen at the time of the transfer.

i.e. the profits arose when you decided to let the place, rather than sell it.

So you may have a tax bill and no cash to pay it.

Equally, it is possible to continue to hold it as trading stock whilst letting it out and waiting for the market to "improve".

[stellad]

Thanks for your replies. I'm not sure the partnership did ever trade a such.
We bought the house in our own names and we own it as tenants in common. We used a mortgage raised against our own house to finance the purchase. The property was not bought by the partnership business which has never even had a bank account. We did renovate the property but all was paid for out of our own individual private bank accounts.
The only reason we filled in the CWF1 form was because we thought we had to based on the info on the HMRC website.
What should I tell HMRC now? Should I contact them and tell them that the partnership is at an end?
Sorry, I'm not a tax expert as you can tell. I just want to avoid getting into trouble further down the line by not doing the right thing now.

[Incredulum]

Even if the partnership did not trade, it does not preclude the two of you from having traded in some form of joint venture.

If you had sold the property straight away after doing it up then there is very little doubt from what you have written that you would have had trading profits. (You intended a quick turn, and did it.) However that isn't what happened. An inability - or a refusal - to sell a house that you intended as trading stock that you does not mean that you never traded; what it means is either:

1) You keep the item as trading stock, with a view to later sale.

2) You approporiate the item from trading stock to fixed assets. At this point you have a deemed disposal of trading stock at market value. i.e. you pay tax on the profits.

Pragmatically, if you never intend to buy and sell properties again, then you may find that if you ring HMRC and ask them to ignore the form you submitted as nothing ever happened then you'll probably be fine that they believe that your property was an investment property from day 1.