New business - Property Trading. Need clarity of some tax

[mrrossi]

Hi everyone

Wondering if someone could help clear up some tax related questions please related to property trading.

My partner has a house she bought just over a year ago that she was renting out but has now decided to sell. She intends to carry on running her sole trader (non house related) business part time and use the profits from selling the house (prices went up and she made some improvements/will make some more) to purchase another house, renovate and sell on etc.

We understand that a LTD company is probably the best way to go for taxation purposes (long term) - although I suppose it depends on how many properties she does a year plus her income for her sole trader business, which is low at approx 3-5K per year.

Can you claim for more expenses related to a property trader business as a LTD company than as a sole trader? I believe you can only deduct expenses for 'improvements' and not 'replacements' - does it make any difference if you're doing as an LTD?

The property at the moment is in her name. If she wanted to sell as a LTD company then I believe she would have to transfer it to that LTD company which is effectively a sale - i.e. stamp duty and CGT would become effective. Is that right? If so it wouldn't make any sense to that with this house I guess.

Thanks

Ross

[So]

mrrossi said:

Hi everyone

Wondering if someone could help clear up some tax related questions please related to property trading.

My partner has a house she bought just over a year ago that she was renting out but has now decided to sell. She intends to carry on running her sole trader (non house related) business part time and use the profits from selling the house (prices went up and she made some improvements/will make some more) to purchase another house, renovate and sell on etc.

We understand that a LTD company is probably the best way to go for taxation purposes (long term) - although I suppose it depends on how many properties she does a year plus her income for her sole trader business, which is low at approx 3-5K per year.

Can you claim for more expenses related to a property trader business as a LTD company than as a sole trader? I believe you can only deduct expenses for 'improvements' and not 'replacements' - does it make any difference if you're doing as an LTD?

The property at the moment is in her name. If she wanted to sell as a LTD company then I believe she would have to transfer it to that LTD company which is effectively a sale - i.e. stamp duty and CGT would become effective. Is that right? If so it wouldn't make any sense to that with this house I guess.

Thanks

Ross

If she is carrying out a business of developing property she can claim the cost of improvements and replacements, basically everything done to the property to redevelop it.

It's probably not worth trying to move the current property into a company. Yes CGT and SDLT would apply.

By the way, if you're asking these questions, firstly you need to find an accountant and secondly you need to think long and hard whether this is a line of business you want to get into. It's not an easy way to make a living if you don't know what you're doing.

[Eric Mc]

The general principle is that the same types of business related costs are offsetable whether the business is being run as a sole tradership, a limited company or something else (such as a partnership).

[Chrisgr31]

What are the rules around capital gains tax of your main residence? Most of us dont pay CGT on our houses, but how long do we need to hold them before its trading?

ie could she buy the house, live in it whilst doing it up, sell it, buy another one, do it up, etc

[mrrossi]

Thanks everyone, some helpful info there.

Chris, this is a house she bought as an investment, she's never lived in it. She lives with me. So living in the houses isn't an option.

Having done some more reading it looks like as she rented that house out, rather that with the intent to buy & sell as a business, that she would have to pay CGT when selling it? Whereas any future ones she buys (personally/sole trader) and sells, without ever renting out, i.e. as a "property trader", that would be taxed as income through self assessment, and not CGT. Is that right?

[Eric Mc]

She bought the asset as an investment rather than part of a trading activity. That would indicate that it would be subject to Capital Gains Tax rather than Income Tax.

In most cases, for an individual that is by far the most beneficial way to treat the transaction,. By being taxed under CGT she would get her annual CGT allowance of (currently) £11,300.


If she has decided she wants to start trading as a property developer, then that is a business and any profits obtained through that activity would be subject to income tax (if operated as a sole trader) or Corporation Tax (if running the business through a limited company).

[mrrossi]

Great - thanks Eric!