Capital Gains tax on second home

Sofaki

Hi there - my husband and I are planning to buy a property at auction to do up and sell on within 6 months - would capital gains tax apply considering we own a house already? If so, if we changed residency to the new house for a couple of months would that mean that there would be no capital gains tax when we sold the new house but there would be for if we were to sell our old house? Very confused about this!!
thanks

CLAPTON

if you plan to sell on then tHMRC will probably view the issue as trade and you will be charged income tax

otherwise you will be charged cgt; you both (if jointly owned) have a cgt allowance of 10,100 .. how much profit do you expect to make?

it's very unlikely the HMRC will acept you have genuinely moved into the property just for a month or so then just happened to sell.

silvercar

You could possibly get away with it once as people do move into houses then change their mind. It is a risk that IR will consider you to be trading rather than making a capital gain, but a single occurance looks almost reasonable.

You could make it your home (to avoid CGT) but that would mean moving into it properly eg changing address with your employers, bank statements etc

sunshinetours

If you buy with intention of possibly renting out once all renovations are done then you could justify the capital gains route rather than trading route which would attract income tax.
As Clapton suggest, buy the house in joint names and you will be able to make £20k profit after the renovations, buying and selling fees etc are taken into account before you pay any capital gains tax

catloverbex

If you are only buying and renovating one property then I think it is very unlikely to be considered a 'trade', but it really does depend on the specific facts in your scenario. If you google "the badges of trade" or go to HMRC website you should find some useful stuff. A one off occurence is much more likely to be considered to be an investment, and therefore is more likely to be liable to capital gains tax instead.

Capital gains tax is not charged on an individuals Principal Private Residence. A married couple must have the same principle private residence (e.g. you cant have a different one each). I think it is very likely that HMRC would reject a claim for principal private residence relief on a property that you had bought, done up and sold very shortly after. However, if you do physically move in there permanently and have documentation e.g. electoral roll, postal records, bank statements registering you as living there then you MAY be able to claim this.

If it was me, I would probably not claim PPR (as I would not feel comfortable that I could support it with sufficient documentation and it seems like a bit of a hassle to move into a property that is being renovated). I would instead claim two lots of annual exemption (£10,100 x 2) and pay capital gains tax on any excess profit.

RedTomato

Given all the news out this week on the poor state of the market are you sure you shouldn't be looking into what to do with a capital loss?

This swapping about of PPR has been done a lot in the past years when people were flipping properties but HMRC are trying to crack down on this and even if you did want to break the law, it wouldn't be advisable.

Sofaki

thanks for all the advice - just to clarify, if we go down the trade route, declare any profit on our tax return and pay income tax, then we don't have to think about capital gains tax? My husband is already self-employed and so fills out an annual tax return - but how does this work if we are taking out a joint mortgage and buying the property in both our names? Would we need to set up a company?

thanks

sunshinetours

No company needed.
I really don't think you would want to be going down the trade route unless forced by circumstances or you are planning to do several of these properties.
I would suggest if you aren't sure on what is what here you make an appointment to see an accountant (you possibly have one if you husband is self employed?)
You could be looking at a large difference in tax depending on route you are guided down