Property question. Capital gains tax in this scenario?
Discussion
Hypothetical question ...
I know if you buy a house to live in and sell it later for more than you paid then there's no CGT to pay. I also know that if you buy a house to live in and buy another as an investment and sell the investment property later, at a profit, that there is CGT to pay.
But, what happens if you rent the place you live in and buy a place to do up and sell at a profit? Do you pay CGT because it's not your principle residence or escape CGT because it's the only property you own?
I know if you buy a house to live in and sell it later for more than you paid then there's no CGT to pay. I also know that if you buy a house to live in and buy another as an investment and sell the investment property later, at a profit, that there is CGT to pay.
But, what happens if you rent the place you live in and buy a place to do up and sell at a profit? Do you pay CGT because it's not your principle residence or escape CGT because it's the only property you own?
MitchT said:
Hypothetical question ...
I know if you buy a house to live in and sell it later for more than you paid then there's no CGT to pay. I also know that if you buy a house to live in and buy another as an investment and sell the investment property later, at a profit, that there is CGT to pay.
But, what happens if you rent the place you live in and buy a place to do up and sell at a profit? Do you pay CGT because it's not your principle residence or escape CGT because it's the only property you own?
If you a buy a property with the sole purpose of renovating it and then selling it on, the profit on the sale of that property will not be subject to Capital Gains Tax - it will be subject to INCOME TAX and also Class 4 National Insurance.I know if you buy a house to live in and sell it later for more than you paid then there's no CGT to pay. I also know that if you buy a house to live in and buy another as an investment and sell the investment property later, at a profit, that there is CGT to pay.
But, what happens if you rent the place you live in and buy a place to do up and sell at a profit? Do you pay CGT because it's not your principle residence or escape CGT because it's the only property you own?
That is because by buying a property with a view to "doing it up" and selling it on, you are actually running a property development business and the business profits are subject to income tax, not Capital Gains Tax.
Capital Gains Tax is payable on properties which are bought as "investments" i.e. they are bought not with an immediate view to renovating and selling it quickly. Often, but not always, investment properties will also be used to generate rental income.
We all know that many people have indeed bought properties for renovation and sale and have returned the profit on disposal as a "Capital Gain". This is not correct but many people have "got away" with this over the years because of poor scrutiny by HMRC.
Under Capital Gains Tax rules, a person's "Main Residence" is completely exempt from Capital Gains Tax rules. If the person happens to live as a tenant in a rented property, that is where he lives and that is his main residence, even if he is only a tenant. Therefore, he cannot claim that a property he has bought and then sold is his "Main Residence".
If you only own one property then it is deemed your main residence whether you live there or not, that's according to HMRC's own tax manuals.
The issue here is one of intent. If you only ever intended to turn a profit then you are trading and it's income tax rather than cgt that is due.
If you could argue you intended it to be your residence and changed your mind you might get away with it. Once, and only once!
Safest option is set up an spv and pay the tax.
The issue here is one of intent. If you only ever intended to turn a profit then you are trading and it's income tax rather than cgt that is due.
If you could argue you intended it to be your residence and changed your mind you might get away with it. Once, and only once!
Safest option is set up an spv and pay the tax.
Pilotoscot said:
If you only own one property then it is deemed your main residence whether you live there or not, that's according to HMRC's own tax manuals.
The issue here is one of intent. If you only ever intended to turn a profit then you are trading and it's income tax rather than cgt that is due.
If you could argue you intended it to be your residence and changed your mind you might get away with it. Once, and only once!
Safest option is set up an spv and pay the tax.
Just owning a single property does NOT mean it is your Main Residence. HMRC will accept it as your Main residence if you can show that at some point it actually WAS your Main Residence. Even if it is in the manual, that does not mean it is what the legislation actually says. HMRC is renowned for not following its own rules.The issue here is one of intent. If you only ever intended to turn a profit then you are trading and it's income tax rather than cgt that is due.
If you could argue you intended it to be your residence and changed your mind you might get away with it. Once, and only once!
Safest option is set up an spv and pay the tax.
There have been cases where people have been caught out by claiming a property was the Main Residence when it really was not.
Sorry to hojack, quick question Eric.
I bought my house as my main residence, renovated May 15 - Dec 15, lived Dec 15 - Mar 16 and it is currently rented as I was offered a new role abroad so it didn't make sense to sell.
When we return, it will likely be to that house, when I come to sell (within 12 months of returning), will I be subject to CGT pro data over length of period owned or not because it 'was' my main residence and not bought as an investment?
I bought my house as my main residence, renovated May 15 - Dec 15, lived Dec 15 - Mar 16 and it is currently rented as I was offered a new role abroad so it didn't make sense to sell.
When we return, it will likely be to that house, when I come to sell (within 12 months of returning), will I be subject to CGT pro data over length of period owned or not because it 'was' my main residence and not bought as an investment?
Simple answer is yes, you are subject to a proportional element of Capital Gains Tax based on the period when the property was not your main residence. HOWEVER, there is a "free gratis" 18 month period which is excluded from the calculations.
If the period where the property was not your main residence is less than 18 months, then none of the overall gain on disposal would be subject to CGT.
If the period where the property was not your main residence is less than 18 months, then none of the overall gain on disposal would be subject to CGT.
7184c said:
Spend money on a good accountant is all I can say.
Ever thought it strange that a pair of high profile brother developers that sound like sweets always have the highest value property in their portfolio listed as a primary residence thus avoiding cgt on tens of millions.
If they are property developers, surely it would be part of their normal trading stock?Ever thought it strange that a pair of high profile brother developers that sound like sweets always have the highest value property in their portfolio listed as a primary residence thus avoiding cgt on tens of millions.
Eric Mc said:
Just owning a single property does NOT mean it is your Main Residence. HMRC will accept it as your Main residence if you can show that at some point it actually WAS your Main Residence. Even if it is in the manual, that does not mean it is what the legislation actually says. HMRC is renowned for not following its own rules.
There have been cases where people have been caught out by claiming a property was the Main Residence when it really was not.
Our replies crossed and I hadn't seen yours. I have been a long term lurker or Pistonheads, especially the house threads as I am in the middle of a self build. Just trying to offer something back, so no need to be so aggressive, it's just my opinion.There have been cases where people have been caught out by claiming a property was the Main Residence when it really was not.
There is case law that if you purchase a property with the intention of it being your main residence, and your circumstances change, i.e. Divorce, job falls through etc. you can sell and still claim PPR relief. The key issue being one of intent: You did intend it to be your main residence, you were not simply doing what the OP suggested and use PPR rules to circumvent being taxed on a trade. I did also say not to try it as they are wise to it and you will have to demonstrate the facts of your case in order to claim.
MrJuice said:
How would the SPV work in buying, developing and selling property? What is the rate of tax?
You would set up an SPV for a single trade. i.e. Purchase, renovate and sell the property. After you realise your profit (hopefully!) you are liable for corporation tax. There are special rules that apply, but providing you have properly structured the company it is possible to then get entrepreneurs relief. I'm abroad at the moment so can't give you chapter and verse but from memory:1. You would have to carry out the trade through a company.
2. The company could not hold any investment properties, it must purely be involved in a trade.
3. You cannot claim relief in respect of disposal of the asset, only the shares.
4. For 12 months before the disposal you have to hold more than 5% of the shares and also be a company officer i.e director or company secretary.
5. You can't hold large cash balances unrelated to the trade.
There may be others but this is from the top of my head. You would then be liable to a 10% tax rate on the gain on the shares in the company.
Trexthedinosaur said:
Sorry to hojack, quick question Eric.
I bought my house as my main residence, renovated May 15 - Dec 15, lived Dec 15 - Mar 16 and it is currently rented as I was offered a new role abroad so it didn't make sense to sell.
When we return, it will likely be to that house, when I come to sell (within 12 months of returning), will I be subject to CGT pro data over length of period owned or not because it 'was' my main residence and not bought as an investment?
There are special rules where it is a temporary absence in order to take up a contract of employment abroad. In my honest opinion, you would not be liable to CGT on the absence but you can get the help sheet on HMRC's website and it explains it in more detail.I bought my house as my main residence, renovated May 15 - Dec 15, lived Dec 15 - Mar 16 and it is currently rented as I was offered a new role abroad so it didn't make sense to sell.
When we return, it will likely be to that house, when I come to sell (within 12 months of returning), will I be subject to CGT pro data over length of period owned or not because it 'was' my main residence and not bought as an investment?
7184c said:
Spend money on a good accountant is all I can say.
Ever thought it strange that a pair of high profile brother developers that sound like sweets always have the highest value property in their portfolio listed as a primary residence thus avoiding cgt on tens of millions.
I second that and I did!Ever thought it strange that a pair of high profile brother developers that sound like sweets always have the highest value property in their portfolio listed as a primary residence thus avoiding cgt on tens of millions.
Pilotoscot said:
4. For 12 months before the disposal you have to hold more than 5% of the shares and also be a company officer i.e director or company secretary.
And voting rights 
Oh, and you can be an Employee too.....but Office Holder does have certain advantages.
Edited by Jockman on Monday 3rd July 19:04
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