selling property and re-investing the gains in same tax year

[zorba]

I will shortly have some capital freed up from the sale of a PPR, and I am thinking of reinvesting in property (which will not be a PPR).

The idea would be to invest, allow the property to appreciate (rising market), or develope it to create a rise - and then sell.

The capital freed up would then be ploughed into the next property/properties.

I have heard of a scheme called "bed and breakfasting" for shares, which allows CGT to be deferred. As far as I can remember, if the profits are reinvested in the same year, no CGT is due. The CGT is only paid when the assets are "realised", i.e. turned into cash.

If this is ok for houses/flats, this would be handy as I could build up a property portfolio, making sure any gains were re-invested in the same tax year. I could then liquidate the property in stages during retirement, acting as a sort of pension. And liquidating it in small enough increments e.g. £40k pa, so that what with CGT exemptions, and income tax thresholds, no higher rate tax gets paid....

Is this feasible/legal ?

Many thanks,
Conor Rafferty

[King_Maker]

Bed & Breakfast (shares) is no longer effective since the new Identification rules.

Its purpose was to utilise the annual CGT Exemption (currently £8500).

It will not work, in practice, for property.

[JasonButcher]

From the facts it looks like you would be trading and therefore the any profit earned would be subject to Income Tax

[zorba]

Thanks King_Maker

What are the new Identification rules, and how do they change things ?

Why is it different for property ?

[zorba]

Thanks Jason,

If this is true, then Income Tax is only payable when the gains are realised within a tax year, I presume ?

I.e. if in 2006 TY (tax year) I sell a house for £150k and invest in a flat for £130k, only the £20k is taxable ?

then in 2007 TY I sell the flat for a profit at £170k, and buy a house at £200k - there is zero profit and therefore no tax ?

and in the second instance, can I offset personal earnings against the "loss" ?

much obliged to you both
Conor

[King_Maker]

The mechanics of B&B meant that you sell (say) 1000 BP shares on Monday and buy back 1000 BP shares on the Tuesday with only a slight risk of a decrease in value and minimal dealing costs.

This would not work for selling No 12 Acacia Avenue and buying it back the next day.

The new Identification rules thwarted this manoeuvre.

"Investing" in a flat for £130,000 does not reduce your profit on the previous deal.

[bob.fraser@towrylaw.]

B&B does still work for shares/unit trusts, but in a slightly different form. Two of the tedchniques are:

1. Bed and spouse. The idea is that husband sells his 1000 BP shares (to continue K_M's example) and his wife buys 1000 BP shares. His wife could sell 1000 Shell shares, and husband buys 1000 Shell shares. There is thus a continuity of holding the shares, whilst using part/all of the annual CGT allowance.

2. Bed and ISA. An individual sells 1000 special situations unit trusts, and buys £7000 of the same unit trust in an ISA.

[JasonButcher]

I am not an expert in property taxation so can really advise.
It just looks like from the outset you intend to buy a property, do it up , sell it , and then repeat the process and earn a profit at the same time - this is trading and will be subject to income tax.
If property taxation is broadly taxed in the same way as other trading income then any losses will be able to be off set against other income.