When do you pay CGT versus profit from a flip?

by Readers Question

6 months ago

When do you pay CGT versus profit from a flip?

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When do you pay CGT versus profit from a flip?

If I buy a property, do it up, and sell it on, I think I have to pay income tax  on the profit.

If I buy a property, do it up, put in a tenant, then sell it down the line, I have to pay CGT.

My question is: What is the cross over point where it goes from tax on profit to CGT?

Thank you

Sunny



Comments

Anon

6 months ago

You are asking the wrong questions. If you have refurbished a property, then by putting a tenant in, you will devalue it, due to wear and tear. So if it best to sell after it has been refurbished.

Also, I think renovations costs prior to first renting are not tax deductible.

Avoid the drama of renting it out!

Mark Alexander

6 months ago

I think you've pretty much nailed the answer within your question. It is the letting of the property which makes the difference between whether it is an investment for taxation purposes or whether you are trading. Therefore, if at least one tenancy has run its course the taxation will be on the basis of an investment. Note the word TENANCY. I think you would be pushing it if that tenancy was for anything less than 6 months. For example, if you let the property as a serviced holiday let for a few days I think HMRC would treat the whole business as trading.

I do not agree with Anon above. There are several factors to consider before deciding which strategy to implement. His comment implies that buy/refurb/sell is a 'one-size-fits-all' strategy and it most definitely is not.

michael Coffey

6 months ago

My entire portfolio is based on purchase, refurbishment and let.
I fit basic kitchens and bathrooms, which are still going strong, for me this has been a winning formula, to dismiss this model can be very short sited.

Roy B

6 months ago

I thought CGT was liable for any property that is not your main residence. Also the cost of doing up a property for rent could not be written off against income but against CGT.

Mark Alexander

6 months ago

Reply to the comment left by Roy B at 28/02/2018 - 11:06
You have expressed two very common misunderstandings there Roy.

If a property is bought and sold without being let then it was never an investment property so CGT is not applicable. The profits made would be taxed as income from trading.

Second is that if you are refurbishing an investment property any repairs or replacements are offset against income and any significant upgrades are treated as capital improvements which are offset against capital gains when the property is sold.

If the property is never let then anything money that is spent on it is offset against the profits on sale.

michael Coffey

6 months ago

I offset my works via income tax, from memory my acc advised this as my most viable option.
I intend to offfload one next year so it will be interesting to see if i can use my paper loss via refurbishment on my CGT liability.

Mark Alexander

6 months ago

Reply to the comment left by michael Coffey at 28/02/2018 - 11:27
Based on what you have said (i.e. the property has been let) I see no reason whatsoever why you should have a problem with treating any capital profits as captal gains and being taxed on that basis. You will also be able to use your annual CGT exemption allowance.

If you're married, make sure the property is in joint names, at least at beneficial level. That way you and your spouse will both be able to utilise your annual CGT exemption allowances.

If the property is currently in your sole name, it is not too late to split the beneficial interest. That needn't involve any changes to any mortgage arrangements you might have either.

If you have no mortgage the cost is £300 inc vat. If you have a mortgage then you will also require a tax consultation which is an additional cost of £400 inc VAT.

The tax saving as a result of fully utilising a spouses annual CGT exemption allowance is either £2,024 if you are a basic rate tax-payer or £3,168 if you're a higher rate tax-payer, so it is definitely a worthwhile exercise.

Fees quoted are as charged by Property118 Limited.

michael Coffey

6 months ago

Would this include loss carried forward from refurbishment which is being offset against my rental income.

Marlena Topple

6 months ago

Reply to the comment left by Mark Alexander at 28/02/2018 - 11:39
Beware though if you have lived in the property previously you will reduce the amount of ppr you are entitled to if you transfer part of the ownership.

Mark Alexander

6 months ago

Reply to the comment left by michael Coffey at 28/02/2018 - 11:49
Possibly, I think you need to run this past your accountant because I don't have enough detail and I don't want to risk misleading you or to get into the required level of detail to be able to advise you on this forum. Please do not construe our forum discussions to be professional advice.

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