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The state of the housing markets has led to many property people changing strategy to avoid losing money on sales.
Property investors come in two types – buy to let investors and buy to sell traders. Both have a different set of rules to deal with the tax on selling a property.
Developer is a term that can fall in to either category as both refurbish homes.
The difficult property market has pulled the plug on buy to sell traders buying to refurbish for a quick and profitable disposal.
Instead, many are still buying properties but letting them after refurbishment until the market changes and they can sell.
The key to paying tax under these circumstances is the property buyer’s intention when they completed the purchase.
If the intention was to buy to sell, then that property remains a buy to sell property even though a tenant may live there for a while.
The rents are dealt with as property income, but the home remains stock in the trader’s business.
When the property is eventually sold, income tax is paid by a trader – or corporation tax if the business trades as a limited company.
That intention on purchase gives the main indication of how the property is taxed:
- Planning to rent out a home shows the buyer intended to invest, so the property is taxed as a buy to let
- Planning to sell the property for a quick profit indicates trading, so the property is taxed as a buy to sell
If the intention is not clear, the tax man will look at the property business in more detail to consider factors like whether the property generates a rent, length of ownership, how the investor has managed other properties and how the deal was financed.
The best way to counter HM Revenue & Customs claiming the ‘wrong’ tax from a property transaction is to keep detailed written records proving the purchase intention.
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