FULLY understanding CGT on property
Discussion
Hi Chaps
Alongside my day job I have gone into a bit of property developing.
It all started by mistake really.... I split with my ex so had to restart.
In may 2014 I purchased a flat which I intended to be my home for a fair while. It was totally refurbished in the weeks after my purchase and I did nothing for 8 months.
I then got it valued, more out of interest than anything. It had gone up in value which meant when I sold it I made a clear profit of 35k.
This got me thinking that I could do this again and again but faster. I spoke with my financial adviser who stated that as long as a property is your sole and only residence you get a relief called Private Residence Relief and there is no CGT to pay.
At the end of April I gave the keys in for flat number 1 and on the same day picked up the keys for flat number 2 which I purchased with the sole intention of carrying out the work, living in it whilst the work was done and being marketed.
It was advertised on Thursday of last week and I accepted an offer on Saturday.
If it all goes through according to plan I will clear just over a 50k profit.
I have just been looking at HMRC guidelines for CGT. There is a section where it states:
You will not get the relief if:
You acquire a dwelling house and/or spend money on it in order to realise a gain on its disposal.....
This makes it sound as if I will have to pay CGT.
Naturally I want to do things right and do not want to get stung by a large tax bill out of the blue.
I am already negotiating on the next property where my intentions will be exactly the same - get it fully refurbished and back on the market within 4-5 weeks. All of the funds from this latest property will be going into the next one...
Any advice is much appreciated
Thanks
Alongside my day job I have gone into a bit of property developing.
It all started by mistake really.... I split with my ex so had to restart.
In may 2014 I purchased a flat which I intended to be my home for a fair while. It was totally refurbished in the weeks after my purchase and I did nothing for 8 months.
I then got it valued, more out of interest than anything. It had gone up in value which meant when I sold it I made a clear profit of 35k.
This got me thinking that I could do this again and again but faster. I spoke with my financial adviser who stated that as long as a property is your sole and only residence you get a relief called Private Residence Relief and there is no CGT to pay.
At the end of April I gave the keys in for flat number 1 and on the same day picked up the keys for flat number 2 which I purchased with the sole intention of carrying out the work, living in it whilst the work was done and being marketed.
It was advertised on Thursday of last week and I accepted an offer on Saturday.
If it all goes through according to plan I will clear just over a 50k profit.
I have just been looking at HMRC guidelines for CGT. There is a section where it states:
You will not get the relief if:
You acquire a dwelling house and/or spend money on it in order to realise a gain on its disposal.....
This makes it sound as if I will have to pay CGT.
Naturally I want to do things right and do not want to get stung by a large tax bill out of the blue.
I am already negotiating on the next property where my intentions will be exactly the same - get it fully refurbished and back on the market within 4-5 weeks. All of the funds from this latest property will be going into the next one...
Any advice is much appreciated
Thanks
If you buy an asset (it doesn't matter what type of asset it is - whether it is a tin of beans or a block of flats) and the intention is to sell it on at a profit, you are TRADING i.e. you are conducting a business.
Therefore, you will pay Income Tax (if an individual) on the profit generated from that trading activity.
If the asset is a building which you happen to live in for a while that DOES NOT magically turn it into a Capital Gains Tax exempt residence.
Capital Gains Tax applies to capital assets which are bought as investments (stocks, shares, paintings, buildings) and not as trading items.
Therefore, you will pay Income Tax (if an individual) on the profit generated from that trading activity.
If the asset is a building which you happen to live in for a while that DOES NOT magically turn it into a Capital Gains Tax exempt residence.
Capital Gains Tax applies to capital assets which are bought as investments (stocks, shares, paintings, buildings) and not as trading items.
On a slight tangent, but another thing to consider moving forward is finance. Not sure how you are financing these properties, but if you are mortgaging then the lenders may soon cotton on to what you're doing and put a black mark next to your name. You may be using bridging finance already, but if not I recommend looking into it (a touch more expensive, but over a 4-5 week period the cost will be negligible and it's also much easier to get approved for than a mortgage).
Eric Mc said:
If you buy an asset (it doesn't matter what type of asset it is - whether it is a tin of beans or a block of flats) and the intention is to sell it on at a profit, you are TRADING i.e. you are conducting a business.
Therefore, you will pay Income Tax (if an individual) on the profit generated from that trading activity.
If the asset is a building which you happen to live in for a while that DOES NOT magically turn it into a Capital Gains Tax exempt residence.
Capital Gains Tax applies to capital assets which are bought as investments (stocks, shares, paintings, buildings) and not as trading items.
Hi EricTherefore, you will pay Income Tax (if an individual) on the profit generated from that trading activity.
If the asset is a building which you happen to live in for a while that DOES NOT magically turn it into a Capital Gains Tax exempt residence.
Capital Gains Tax applies to capital assets which are bought as investments (stocks, shares, paintings, buildings) and not as trading items.
So what are you saying?
That to do it properly I would pay income tax and not CGT?
If you bought it as a property development project, then that is a trading activity so yes, the profit would be subject to Income Tax (and Class 4 National Insurance as well).
Even if you lived in it for a bit that would not make a difference.
There was a tax case in the last year or so where this is what the taxpayer tried to do. He bought a property, developed it from the moment he bought it and slept in it whilst working on it.
He therefore expected to be able to claim that -
a) the profit was of a capital nature and subject to CGT
b) would be eligible for the annual CGT allowance
c) he might even be eligible for Main Residence Relief as he lived in it
All three claims were rejected by HMRC as they said it wasn't a capital transaction, it was a trading transaction.
Even if you lived in it for a bit that would not make a difference.
There was a tax case in the last year or so where this is what the taxpayer tried to do. He bought a property, developed it from the moment he bought it and slept in it whilst working on it.
He therefore expected to be able to claim that -
a) the profit was of a capital nature and subject to CGT
b) would be eligible for the annual CGT allowance
c) he might even be eligible for Main Residence Relief as he lived in it
All three claims were rejected by HMRC as they said it wasn't a capital transaction, it was a trading transaction.
Eric Mc said:
If you bought it as a property development project, then that is a trading activity so yes, the profit would be subject to Income Tax (and Class 4 National Insurance as well).
Even if you lived in it for a bit that would not make a difference.
There was a tax case in the last year or so where this is what the taxpayer tried to do. He bought a property, developed it from the moment he bought it and slept in it whilst working on it.
He therefore expected to be able to claim that -
a) the profit was of a capital nature and subject to CGT
b) would be eligible for the annual CGT allowance
c) he might even be eligible for Main Residence Relief as he lived in it
All three claims were rejected by HMRC as they said it wasn't a capital transaction, it was a trading transaction.
Hi EricEven if you lived in it for a bit that would not make a difference.
There was a tax case in the last year or so where this is what the taxpayer tried to do. He bought a property, developed it from the moment he bought it and slept in it whilst working on it.
He therefore expected to be able to claim that -
a) the profit was of a capital nature and subject to CGT
b) would be eligible for the annual CGT allowance
c) he might even be eligible for Main Residence Relief as he lived in it
All three claims were rejected by HMRC as they said it wasn't a capital transaction, it was a trading transaction.
How would it work if the gains are put straight into another property?
The day I complete on one property I complete on the next one as an example.
Cheers
I think it would indicate you really were running a property development business i.e. "trading" as a property developer. Therefore, it would weaken any argument that what you had achieved was a "Capital Gain" rather than a "Business Profit".
At the end of the day, how you approach this issue is down to you. Many "developers" have successfully declared their development profits as "Capital Gains" rather than "Business Profits". This is mainly because they have chosen to handle it this way on their Self Assessment tax returns and HMRC have not investigated the matter properly due to incompetence or lack of resources.
HMRC has a definition of what trading is -
What is a trade?
“Trade” is defined for tax as "any venture in the nature of trade".
Over the years the courts have taken this to include "a trade, manufacture, adventure or concern in the nature of trade". The term is “commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services".
Many different activities are described as trading. The “badges of trade” are accepted by the courts as a reasonable way of establishing whether a transaction was trading or capital in nature.
The badges of trade:
The subject matter of the realisation.
The length of the period of ownership.
The frequency or number of similar transactions by the same person.
Supplementary work on or in connection with the property realised.
The circumstances that was responsible for the realisation.
Motive.
At the end of the day, how you approach this issue is down to you. Many "developers" have successfully declared their development profits as "Capital Gains" rather than "Business Profits". This is mainly because they have chosen to handle it this way on their Self Assessment tax returns and HMRC have not investigated the matter properly due to incompetence or lack of resources.
HMRC has a definition of what trading is -
What is a trade?
“Trade” is defined for tax as "any venture in the nature of trade".
Over the years the courts have taken this to include "a trade, manufacture, adventure or concern in the nature of trade". The term is “commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services".
Many different activities are described as trading. The “badges of trade” are accepted by the courts as a reasonable way of establishing whether a transaction was trading or capital in nature.
The badges of trade:
The subject matter of the realisation.
The length of the period of ownership.
The frequency or number of similar transactions by the same person.
Supplementary work on or in connection with the property realised.
The circumstances that was responsible for the realisation.
Motive.
Am I right in saying that I would be subject to capital gains tax still if I moved into a property, renovated it, lived in it for say a further three years and then repeated the process on a more expensive property and use the extra equity as my renovating fund?
But as the time scale is longer and I'm not systematically developing properties one after another HMRC are likely to look on it more favorably?
As I'm on modest income the only way for me to move into my forever home is by doing the above.
But as the time scale is longer and I'm not systematically developing properties one after another HMRC are likely to look on it more favorably?
As I'm on modest income the only way for me to move into my forever home is by doing the above.
Every case is different.
The length of time someone lives in a property is only one factor that they need to be aware of when trying to claim the "Main Residence Exemption". There can be circumstances where "Main Residence Exemption" can be correctly claimed even if the taxpayer NEVER lived in the property and there will be cases where it can't be claimed even when the taxpayer HAS lived in the property.
If HMRC chose to examine a situation, it is usually because they feel there is some element to the situation that doesn't quite "ring true" in their view.
As for property trading, the length of time between buying the property and eventually selling it MIGHT help your cause in claiming it wasn't a sale in the nature of a trade - but I have property developer clients who have taken five or six years to sell a property they developed. It didn't magically turn the sale into a Capital Gains type transaction.
The length of time someone lives in a property is only one factor that they need to be aware of when trying to claim the "Main Residence Exemption". There can be circumstances where "Main Residence Exemption" can be correctly claimed even if the taxpayer NEVER lived in the property and there will be cases where it can't be claimed even when the taxpayer HAS lived in the property.
If HMRC chose to examine a situation, it is usually because they feel there is some element to the situation that doesn't quite "ring true" in their view.
As for property trading, the length of time between buying the property and eventually selling it MIGHT help your cause in claiming it wasn't a sale in the nature of a trade - but I have property developer clients who have taken five or six years to sell a property they developed. It didn't magically turn the sale into a Capital Gains type transaction.
Willeh85 said:
Am I right in saying that I would be subject to capital gains tax still if I moved into a property, renovated it, lived in it for say a further three years and then repeated the process on a more expensive property and use the extra equity as my renovating fund?
But as the time scale is longer and I'm not systematically developing properties one after another HMRC are likely to look on it more favorably?
As I'm on modest income the only way for me to move into my forever home is by doing the above.
As Eric has alluded, HMRC's view (if they choose to ask) is about your "intentions" at the outset.But as the time scale is longer and I'm not systematically developing properties one after another HMRC are likely to look on it more favorably?
As I'm on modest income the only way for me to move into my forever home is by doing the above.
Having said that, there are thousands doing as you describe above and simply treating the property as their "main residence" for a reasonable period of time and claiming PPR on the sale, following which they then move up the property ladder and do the same.
In my opinion, HMRC don't challenge this type of behaviour.
However, in and out of properties every 6 - 9 months will eventually lead to an enquiry as the new online Stamp Duty returns required on each sale/purchase are now linked to the Self-Assessment risk profiling software. Moreover, you may have gone through a few properties before the issue arises, and then you have a number of big and potentially financially crippling issues to deal with!
David
sumo69 said:
As Eric has alluded, HMRC's view (if they choose to ask) is about your "intentions" at the outset.
Having said that, there are thousands doing as you describe above and simply treating the property as their "main residence" for a reasonable period of time and claiming PPR on the sale, following which they then move up the property ladder and do the same.
In my opinion, HMRC don't challenge this type of behaviour.
However, in and out of properties every 6 - 9 months will eventually lead to an enquiry as the new online Stamp Duty returns required on each sale/purchase are now linked to the Self-Assessment risk profiling software. Moreover, you may have gone through a few properties before the issue arises, and then you have a number of big and potentially financially crippling issues to deal with!
David
Great reply. It is this that concerns me.Having said that, there are thousands doing as you describe above and simply treating the property as their "main residence" for a reasonable period of time and claiming PPR on the sale, following which they then move up the property ladder and do the same.
In my opinion, HMRC don't challenge this type of behaviour.
However, in and out of properties every 6 - 9 months will eventually lead to an enquiry as the new online Stamp Duty returns required on each sale/purchase are now linked to the Self-Assessment risk profiling software. Moreover, you may have gone through a few properties before the issue arises, and then you have a number of big and potentially financially crippling issues to deal with!
David
Yes I could say that I am selling this flat so quickly as it is too small as an example.
I may buy another one or two and think about renting out instead of selling.
TROOPER88 said:
Great reply. It is this that concerns me.
Yes I could say that I am selling this flat so quickly as it is too small as an example.
I may buy another one or two and think about renting out instead of selling.
Just remember to register for self-assessment if you have rental income....and get a decent accountant to minimise your tax bill (cough, cough!!).Yes I could say that I am selling this flat so quickly as it is too small as an example.
I may buy another one or two and think about renting out instead of selling.
You may be able to minimise/eliminate a big chunk of tax if you live in the properties for a while, then rent, then sell.
Drop me a PM if you want to chat.
David
Eric Mc said:
Why?
The nature of the transaction is not predicated by whether you have an alternative source of income.
I think if HMRC thought your sole means of earnings was by buying and selling your primary residence and you couldn't prove that you had other earnings they might (and probably would) take a dim view of it. The nature of the transaction is not predicated by whether you have an alternative source of income.
I know rules are rules but I also have a piece of paper from HMRC confirming tax allowances on something I invested in six years ago which they have now changed their mind about! And there's been absolutely no change in the relevant tax legislation since. They can basically do what they want as far as I can make out....as an individual it's very hard to fight them.
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