CGT: Where is the liability? Will I be viewed as avoiding Income Tax?

[Pumpkin House]

Can someone please advise me:

Background:
My husband and I are registered as self employed with HMRC in a partnership as property developers. We buy small run down residential properties, fix them up and sell on. WeÂ’ve only done one property since forming the partnership.

WeÂ’ve seen a plot of land that has two barn conversions up for sale advertised either as separate lots or as a whole. WeÂ’re interested in buying one of the barns as our home.

Planning permission is expiring soon and in order to secure the deal, the vendor has offered us both barns at a significantly reduced price. He wants payment for the first barn up front as normal and is then willing to accept payment for the second barn via two installments spanning a year. At the end of the year we will get full title and freehold for the second barn.

Our intention is to remortgage our existing home to raise the funds to buy the first barn outright and have enough set aside for the first installment of the second barn. We will then put our home up for sale and move into the first barn once our home has been sold. This first barn regardless of condition will become our main residence.

At this point, in order to pay for the second barn we will need to remortgage the first barn. As the second barn is on a larger plot we feel we might want to then make that our home and would sell that first barn and not move into the second barn until the first barn had been sold. That second barn would then become our home.

Can someone please tell me if there are any CGT implications. Our accountant has said there could be somewhere along the way so letÂ’s see what happens and monitor the situation as and when it happens.

Our accountant has also said as we are set up in business as property developers we need to be careful that these transactions are not deemed part of our normal business and it could be viewed by the HMRC that we are trying to avoid paying potentially hefty income tax and NI fees.

I’m not fond of the “let’s see what happens” scenario and would appreciate some clear cut advice so I can plan correctly from the beginning the best way forward.

Thank you.

[deanshepherd]

In my humble opinion, whether you are subject to income tax rules or capital gains tax rules depends on your intention for the properties. Given your line of work, I would recommend that these intentions are documented.

It appears that it is your intention to purchase one of the barns to live in and one of the barns to renovate and sell at a profit.

Therefore Barn 2 will be subject to CGT on any eventual sale (with all the usual PPR reliefs) and Barn 1 will be part of your normal trading income when sold, regardless of whether you lived there.


Dean
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

[Pumpkin House]

Thank you Dean.
I now realise and understand CGT when selling Barn 2 but how can the sale of Barn 1 be deemed part of my normal trading income when sold regardless of whether I lived there? This Barn 1 would be my home. Are you in effect saying that because I am a "property developer" my own home will always be subject to income tax when sold?
Thanks

[AndyLevett]

Any home which is deemable as your PPR will surely not be subject to income tax.

I believe the most likely scenario is that the profits you make from these transactions will be subject to income tax and then the Barn you are left with will become your PPR from the time you moved in to the first Barn.

[deanshepherd]

Nepenthe

You misunderstand me. I am not saying that your home will be subject to income tax at all.

HMRC will look at the facts of the case. You are not buying both barns to live in as your home. You are buying one to be your home and one to sell at a profit. The fact that you will, at some stage, live in both does not then make both of them your home.


Dean
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

[pallet]

Clearly dean should know, but like you I feel that if you purchased barn 1 to live in buy selling prevouse home, then see a better and bigger barn after 1year and done it up for a year then lived in barn 2 and sod barn 1 .Would it not be the same as the first trans action when barn 1 was purchased.I can see how property developer could help the taxman at a later date so I think clarfcation is very inportant at this point

[deanshepherd]

pallett..

I agree with you completely. The situation you describe would indeed be the same as the first transaction and I believe all properties in that case would be exempt from CGT.

The difference here is that the two barns are being purchased at the same time. I think HMRC will successfully argue that it was not the intention of the purchaser to retain both properties to live in as a residence.


Dean
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

[pallet]

Dean

in which case should they delay the purchase of barn 2 for a year which I thought was their intention .The problem is the paper work may show nepenthe true intention . Would it work if the property company exchanged on barn 2 but nepenthe completed the purchase a year later(at market value )back to back so to speak so there is only one stamp and any profit would be in the partnership anyway

[Pumpkin House]

Thank you Dean and Pallet for your comments:
To clarify: Both barns are not being physically purchased at the same. Barn 1 will be paid for in full on the day of completion. Barn 2 payment structure will be 1/3 after 4 months from Commencement of Works Certificate being issued by Building Regs on Barn 1 and the remaining 8 months later.
My feeling on Stamp Duty is that I would rather pay 1% on each which would be considerably less than 3% on the both.
OK how about this... we cease the trading partnership as "property developers" which is truthfully what we were planning on doing anyway as it hasn't been the booming success we had hoped. Therefore avoiding any trading income issues altogether. What do you think? THANKS!