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Where Taxpayers and Advisers Meet

Flat conversion

Mr Crowley
Posts: 1
Joined: Tue Dec 11, 2018 11:16 pm

Flat conversion

Postby Mr Crowley » Tue Dec 11, 2018 11:22 pm

Hi all

In January 2017 I bought a residential property jointly with a friend of mine, with the intention of converting it to 2 flats for subsequent resale (so liable for income tax rather than CGT).

The first completed flat (flat 1) sold in December 2017, but at this stage we had technically not realised a profit, as the sale proceeds from flat 1 were less than our total costs to date, although we did of course still jointly own the newly created flat 2.

The second flat (flat 2) was then sold in May 2018 (i.e. in the next tax year) at which stage we realised a net profit for the overall project.

We are now completing our personal tax returns for 2017 / 2018 and have a question as to how we report the profit from this project for income tax purposes. I think there are 2 possible options:-

1. Report no profit for the 2017/2018 tax year, as we had not yet made a profit from the project, given that as at YE 4/2018 our costs exceeded the sale proceeds received from flat 1. Then report the final true total profit in our 2018/2019 tax returns

2. Try to split the costs to YE 4/2018 between the 2 individual flats (which would be very difficult to do accurately, as they were not of equal size, number of bedrooms, value etc) and try to calculate a theoretical profit for flat 1 in isolation.

Which would be the correct way to report the profit from this project in our tax returns?

Many thanks

Posts: 2947
Joined: Wed Aug 06, 2008 4:01 pm

Re: Flat conversion

Postby robbob » Wed Dec 12, 2018 9:42 am

Option 1 is wrong on normal principles - so option 2 is the way forward if used correctly, the cost of property and associated work done on property needs to be treated as "stock" and rolled up until sale. So you will need to do reasonable proportioning with regard costs that are split between the two properties - it shouldnt be that hard to get figures that are sort of reasonably ok. The sale with regard to property 1 will only release the costs with regard to that property by reduction in the stock value by value of costs relating to that property to date.

I would recommend doing further research and getting a decent property tax book or similar help sheets so you fully understand the principles involved before submitting to hmrc.

Note i would only really expect hmrc to look closely if the figures came out wonky and there was a delay in tax or a differential in the tax rates between the two years - so try and keep everything impartial. Note timing of sales of property can have a huge impact on tax payable so ideally you want to try and plan everything so you know what tax impact will be before starting - hopefully the splitting of profit into two tax years is more likely to help rather than hinder in that regard :)

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