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  • Tax

    Investor or Developer?

    If I buy a property for £80k, spend £20k on refurbishment and sell for £120k I will pay income tax on the £20k profit as a developer.

    If I buy  a property for £100k and rent it for £10k pa I will pay income tax on my investment. If I sell it after 5 years for £120k I will pay Capital Gains Tax on the £20k increase as an investor.

    If I buy a property for £80k, spend £20k on refurbishment, rent for 2 years at £10k pa, then sell for £120k which tax is due on the £20k gain? I will have made £20k as an investor and £20k as a developer. I'm sure HMRC wouldn't just let me choose the cheaper option!

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    It has a lot to do with your intentions frrom the outset.

    If you did it once and said your intention was this but then you decided to to do that then  HMRC may accept the cheaper tax option for you on face value

    But they will have seen what you are attempting to do 1000 times before so will keep an eye on you maybe .

    If you repeat the exercise 2/3/4/5 times in say a 5 year period your intentions become clearer as a pattern develops.. You should be then taxed accordingly  

    Over a short time span and with just one property HMRC may accept your `best tax option  to suit me ` version  as they cant prove otherwise and yes  people are fickle and do legitimately chop and change their minds .  If you did it  50 times though the best tax option for me version weakens and HMRC may call you in for a more in depth interview as to what your intentions really were / are..

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    Jonathan Clarke. http://www.buytoletmk.com


    Hi Gary, the link doesn't work. What did it say?

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    I've copied the bulk of the text below:

    In some cases the distinction is clear:

    Mr Mole buys a house, which he refurbishes and lets for five years before selling it. Clearly, Mr Mole is a property investor and has made a capital gain on the sale of the property. Mr Rat buys the house next door, and immediately puts it on the market while he refurbishes it. Within three months, he sells it at a profit. Equally clearly, Mr Rat is a property developer and will pay income tax (and Class 4 National Insurance) on his profit. He will also have had to operate the CIS on payments to the subcontractors who did the refurbishment.

    In real life, of course, things are generally not so clear cut. HMRC will tend to argue for property development wherever possible, as the rates of income tax are higher (at 20%, 40%, or 45%) than those of capital gains tax (at 18% and 28%). What do HMRC look for when deciding whether a sale of a property is trading or not?

    Intention

    This is crucial. In order for the sale to be a trading transaction there must have been an intention to trade. This intention may have been formed at the time the property was acquired, or it may be formed later. If instead of just selling the property, Mr Mole had demolished it and built a block of flats in its place, which he then sold off on long leases, the fact that he originally bought it as an investment would not prevent his having subsequently (when he decided to build the flats) started a trade of property development and transferred his investment property to trading stock.

    Repetition

    Even if he lets a property before sale, if a person routinely buys properties, lets them, and then sells them, he is probably trading.

    Similar Activities

    A property developer may acquire a Buy-to-Let property as an investment, but HMRC will be more suspicious if he then sells it quickly than they would be with another person who did not have such a track record.

    Finance

    Where the acquisition is financed with short-term funds so that it is essential to sell it quickly, this is good evidence of trading.

    Timing

    A property investor might buy a property intending to let it, before receiving an excellent offer for it, leading to a quick resale – but HMRC will take some convincing that a quick turnover of a property is not trading.

    Acquisition

    If you inherit a property, the presumption is that you are not trading when you sell it, though if you develop it significantly before you sell it that could change – as with Mr Mole in the “Intention” paragraph above.

    These points are called the “Badges of Trade”. They do not all need to be present for a transaction to be a trade, but they illustrate the thought process behind the distinction.

    Planning Point

    It is important to be clear whether you intend to trade by selling a property at a profit, or to invest by deriving a continuing rental income from it. The tax treatment will depend on whether you are trading or investing, as will your responsibilities under the CIS.

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    Don't forget the SDLT that you pay as an investor and as a developer. That's the thing that seems to make fewer opportunities attractive, unless I 'm missing something

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    There are opportunities, albeit limited ones. SDLT shouldn't be the deciding factor, but it makes a difference. I have been looking at 3/4 bed houses in the price range £150/200k. 2 other examples I recently viewed online.

    • 4 bed B&B with 2 bed owners accommodation, C1 and C3 usage, could easily be used as a 6 bed HMO or a 4 bed lodging house without any significant alteration. It also wouldn't be difficult to adapt it to a bed house plus a 4 bed house. At £200k the SDLT would only be £1k as it is mixed use.
    • 60 sqm shop with separate 55 sqm storage unit above in a residential area. The storage unit has a shower room and a kitchen, the shop has a cloakroom and a kitchenette. There is a small courtyard at the back and allocated parking for 4 cars at the front. Its well within permitted development for residential conversion, ideally as 2 2 bed flats. At £140k it is slightly cheaper than a similar sized residential property in the same area and there will be no SDLT due.

    It would be interesting how HMRC would define these projects, especially if one part of the property was developed and let (investor) and the other part was developed and sold (developer), how would costs and profits be allocated, at what point would CIS registration be required? As I will not have the funds until 2018, it seems that now is a good time to ask the questions and understand the options.

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