A Quiz For Property Traders

I am new to this,, being a learner
I think £75000 is total earnings.
Yes The deal Is profitable.
9/10.
Regards,
Poonam +919822074031.

Observation: Where are all the accountants, this is a tax conundrum with a twist.
Q: How much gross profit or loss has the property trader made?
A: Very little difference due to taxation even though gross difference is 100K and 60K ( before tax). This indicates that there is a sweet spot in trading property due to applying Tax know how.

Q: How much better or worse off will the property trader be as a result of doing these two deals assuming that all tax rates remain unchanged as of today – 29th June 2021?
Ans: 1st Deal : - +£100K - sole trader taxes i.e. (a) as a higher tax payer or (b) as a lower tax rate payer
2nd Deal : - +£60K - sole trader taxes i.e. (a) as a higher tax rate payer or (b) as a lower rate tax payer

I`m guestimating that in both deals there is little or no difference, hence the twist. Highlighting that a good accountant/ tax accountant or personal tax know how can make all the difference on a deal. It is not necessarily the gross profit amount but the tax management that is paramount. Also likely that he uses the property as prime residence and rents out his original ( 2nd home) to increase profit on the deal. Maybe the lower rate tax payer sole trader is better off.
Come on where are the tax accountants ?
Finally the operative word `TRADER` means that he trades as a company so this has tax implication into the equation as well.

I suspect the Accountants are afraid to play for fear of looking silly. Another thought is that they might be waiting to post on the 11th hour for fear of someone picking up on issues that have yet to be mentioned and thus giving someone else an opportunity to post an even better answer.

Tactics?

Time will tell

🤔

So what's the answer smartie pants? 😉

THE ANSWER

The Gross Profit on the first deal is not £100,000. This is because there would have been 3% Additional SDLT to pay as on 28th June 2021, so we must deduct £6,000 leaving a Gross Profit of £94,000.

There was no mention of sales agents commission to sell the property either.

CGT annual exemption allowances do not apply because the properties were never let. Therefore, income tax (not Capital Gains Tax) would be payable plus Class 2 and Class 4 National Insurance contributions.

Income tax bands in the 2021/22 tax year are £nil on the first £12,570 and then 20% on the balance up to £50,270 and then 40% on the remainder in this occasion. Therefore, income tax on this deal would be £25,031.80.

On top of this the trader would have paid £3.05 per week in Class 2 National Insurance plus a further £3,663.18 of Class 4 National Insurance. Therefore, total NIC for the year = £3,821.78.

The traders profit after Stamp Duty, National Insurance and Stamp Duty would have been £65,146.42.

The question made it clear the trader is already a homeowner (hence the 3% additional Stamp Duty falling due) and that he did the deal in his own name rather than in a company.

The same principles to the above can also be applied to the second transaction.

The point of this exercise is to show why is it so important to engage an accountant who understands property taxation but also to engage a professional tax consultant.

All of the people who answered this question overlooked at least one if not many important points of taxation.

PS - there are other factors to take into consideration too. What about Council Tax on the vacant home, conveyancing costs for buying and selling and insurance for the property. Then there are the accounting costs. Can anybody think of any others?

After a few false starts, and finally realising CGT was a red herring, I still miss calculated the NIC...Grrrr!
Anyhow, Utilities spring to mind.
But aren't Travel, insurance, Utilities, maintenance, ie costs all offsetable against tax?
Isn't there a need for an empty dwelling Ins surcharge? Also offsetable?
All small fry in the grand scheme, but every little helps.