Tax Implications of Property Development

wide_skies

Hi all,

I am new to the forums but recently posted on the mortgage board. My partner and I wanted to borrow an unfeasibly large amount to buy the flat above mine, unify the two together and sell at a profit. Forum users have helped me to understand that this is unlikely to happen but the bank of mum and dad may come riding to the rescue...

My dad lives in an unmorgaged house worth £380,000 which could be rented for £1000 pcm. He is on a retirement income of £30,000. We have been advised that he could raise a BTL mortgage of £214,000+ which would be enough to buy the flat above us outright. We could then convert the two together, sell at a profit and repay dad with interest. My first question is, assuming he survives seven years, would there be any tax implications to him giving us 214k and us repaying it with interest in 1 or 2 years?

He may also be in a position to lend us cash towards the refurbishment. (Again, this would be repaid by us.) Again, would there be any tax implications?

I'm assuming that tenants would have to go into his house rather than the flat above us (during the period between buying and converting). This would mean that we couldn't, for example, rent out the flat and offset the mortgage payments (secured on his house) against the income we could be getting from the upstairs flat. If anyone could tell me anything different I'd be grateful to know. Is there a way around this? Could the flat be put in my dad's name to allow 'offsetting' or would this create extra chaos when the house came to be sold in our names? Would offsetting the circa 40k for refurbishment against the circa 17k income mean no income tax to pay and could this 40k be split over two tax years?

I would also love to know about CGT issues. Am I right in thinking that there would be none to pay if we sold the unified house within three years or would we have to live in it for a certain period of time as our PPR?

Please accept my apologies for such a long and rambling post. I would be grateful for any insights.

bris

The only tax implication would be the from the interest he earned on the money he lent you, but that would be his tax to pay not yours, this would be treated as a loan not a gift.
As long as the converted building had one address and council tax bill etc then it would be classed as your main residence. You would not have to pay CGT as long as it was your only home and you did actualy use it as your home i.e you didn't rent it out and go rent another place to live.
the tax man would like you to live in it for about two years but this is not set in stone so the actual law on that may well allow a shorter period.

wide_skies

Thank you bris.

diable

What is the projected profit in this business after all costs have been accounted for and what would happen if property prices stall or fall by 10% as I can't really see a mortgage of £214k being raised by your father.

wide_skies

Hi diable,

Projected profit is 20%. It's a good point to think about a 10% fall in prices-this would wipe out our 20% profit but there's still plenty of equity in the flat we already own so dad would get paid back. It's a good argument for turning the project around quickly rather than getting tenants in and taking longer though. The broker I spoke to indicated that the £214k could be raised as a BTL mortgage secured on my dad's morgage free house. I think that if it was a morgage based on his retirement income it would only be 3.5 times his income-about 105k. Thanks for your post.

Pennywise

Am I missing something? If you Dad is getting a buy to let mortgage, where's he going to live for the duration of the mortgage when he's renting it out? Is he going to live with you or does he have another house to live in - otherwise he'll have to pay rent for a roof over his head.

missile

I doubt very much that two flats converted into one will be more valuable than two seperate flats

wide_skies

Hi Pennywise and Missile,
My dad, somwhat handily, will spend most of the period travelling and living with us when he is not. I'd normally agree about the relative value of flats v house but this property is in the catchment area of several popular schools; an area oversupplied with flats and a scarcity of family homes.

jimmo

As I understand it, there can be planning permission problems trying to convert what is currently a number of dwelling houses into one. It potentially reduces the number of homes available in the local authority area.
Have you considered that?
Entrepreneurs generally say that you should firstly look to make a profit and if you can make a profit then you can worry about the tax implications.
Coming to the things that I claim to have a bit of knowledge of I would suggest that your motive for buying the upstairs flat is to make a profit, not develop a better home for you and your family.
Therefore any profits you realise will be subject to Income Tax rather than Capital Gains Tax.
However if HMRC fails to establish that you are acting as a property developer it has a fall back option of isolating the capital gain on your current home which is exempt from Capital Gains Tax from the gain from the upstairs flat and the “marriage value” of the 2 properties, both of which are chargeable.
If you can afford to take professional advice get it now.