Capital Gains and Business

Lizzy

Hi all this is my first visit to the tax forum.

Sorry if this has been covered before but I can't go through every thread.

My husband and I have buy to let properties that we rent out to students. Because we are really good at renovating them we have (almost) decided to by a house to renovate and sell. He will be taking a wage from the renovation because he will be GIVING UP HIS JOB !! to do it.
What we would like to know is how will the tax work. Will we have to pay CGT on any of the profit if the money is going into another house to renovate. Also how does the wage element of it work?

I hope that is clear but please ask for further info if you need it.

Your help will be greatly appreciated.

Many thanks

Lizzy

johnllew

He will be acting in the same way as a builder/developer and any profit on the property is likely to be liable to income tax not capital gains tax. Any wage he takes will be drawings from his building business and is not allowable against the profits of that business.

Lizzy

Thanks for that.

So that means all profits are subject to income tax ? as the wages have (hopefully) come out of the profits?

Will a business account be required ?

Thanks for your help

Lizzy

johnllew

If it's deemed to be a business then all profits will be liable to income tax. Any wages paid to employees other than himself will be deductible. It would be best to have a separate bank account for this venture, to keep transactions from getting mixed up with your BTL/private ones. Some useful info "Starting Up In Business" here: http://www.hmrc.gov.uk/startingup/index.htm

Petmidget

This almost certainly going to be a venture in trade as posted above. This could throw up some interesting problems.

For a start you will have class 4 NI's to pay on top of income tax. the potential profits in a successful refurbishment can be huge they could easily push you into HR bands with only 1 project.

Other options maybe to form a partnership, this would depend on you/oh relative earnings.

or consider a ltd co, oh draws a modest salary and the balance of profits paid as dividends. This would be my front runner as also has the advantage of demarking your current BTL's which could be drawn into trading without the legal status.

Though if you only do this as a 1 off event you could still self assess as a CGT transaction and then fight the fight if HMRC challenge.

johnllew

Petmidget wrote:

if you only do this as a 1 off event you could still self assess as a CGT transaction and then fight the fight if HMRC challenge.

On what grounds? Dodgy advice,IMO. Do you really want to incur interest & penalties?

Petmidget

johnllew wrote:

On what grounds? Dodgy advice,IMO. Do you really want to incur interest & penalties?

On the basis if and only if this is an isolated project, then the ability for HMRC to prove trade would be slim, difficult or nigh on impossible.

It would be very simple to state it was intended to be a BTL but once refurb'd the value had increased so markedly that an immediate sale became an opportunity too good to miss. Problem HMRC will have is proving intention at the outset, trade in this area is often a balance of subjective opinions and not straight assessment of fact, lots of grey to play with.

johnllew

Petmidget wrote:

It would be very simple to state it was intended to be a BTL but once refurb'd the value had increased so markedly that an immediate sale became an opportunity too good to miss.

Lizzy has already stated what the intention is: "we have (almost) decided to by a house to renovate and sell" - you are suggesting they lie to evade tax.

Petmidget

johnllew wrote:

Lizzy has already stated what the intention is: "we have (almost) decided to by a house to renovate and sell" - you are suggesting they lie to evade tax.

No, I am suggesting that 1 event is not "necessarily" a trade and for that matter neither is 2 or 3. Intention is just as important here.

I would suggest they sit down and consider whether this in light of all the detail which they have, combined with HMRC "badges of trade" guidance and possibly a professional opinion whether they are going to be conducting a trade for the purposes of income tax.

I would never suggest anyone evade tax, I am a qualified professional and value my reputation as such. I am just pointing out that this particular area has a lot of grey in it and to self assess as a trade if it is not necessary would be costly and foolish.

Petmidget

Petmidget wrote:

It would be very simple to state it was intended to be a BTL but once refurb'd the value had increased so markedly that an immediate sale became an opportunity too good to miss. Problem HMRC will have is proving intention at the outset, trade in this area is often a balance of subjective opinions and not straight assessment of fact, lots of grey to play with.

Quoting myself, oops.

To clarify this was not a suggestion as to a tactic, this was meant to be an example of a potential valid situation where a CGT transaction could appear to be trade but remain in realms of CGT.

Having re-read it, I can appreciate it may have been slightly misleading.

Sorry

Lizzy

Hi thanks for the replies.

You have given me a couple of options. The end result needs to be which way to go to avoid legally paying too much tax, wether it be CGT or income tax. I can see the idea of small wage and dividend payments.
The job my husband is giving up is our joinery manufacturing business which is a limited company. It has never made enough money for a dividend payment to be made. The main reasons for giving it up is that he is sick and tired of all the legislation PAYE, VAT, Health and Safety and all that goes with employing people and paperwork. He is a joiner himself but the stress of the rest of it is too much. Steps have been taken to end it and staff have been given notice. We are going to keep the workshop on (rented) for our own purposes in house renovation. So we would only want to do the min of paperwork and this is not really possible with a limited company. We need a bit of enjoyment out of life. Another small business drop out because legislation has made it too hard to carry on. A huge shame as another loss of talant, one of the very few allowed to do conservation work on the old buildings of Chester.

I can see this is a difficult area because if the new house does not at this time make any or enough profit on its renovation we could rent it out and use it as a buy to let. It could end up a complete disaster and we might never do another one. It's like saying is the unborn baby a boy or a girl, who knows until the end.

Any further thoughts will be appreciated.
Many thanks
Lizzy