Capital Gains Tax question

travel_freak

Hi there,

I've also posted this query on the house buying board but just in case it doesn't get any replies there, I post again below.

I recently bought a buy to let, with a buy to let mortgage. It hasn't yet been let as I've been doing refurb works. However I've just had estate agents round for a valuation as I suspected I may have bought it keenly priced and it seems I could make a good profit if I sell now.

Please can anyone advise what the capital gains tax position would be if I were to sell now? Have literally only owned for just over a month. It would be my intention to re-invest the profit in purchasing another property - would doing so avoid having to pay CGT and, if so, is there a time limit/procedure to follow in order to do so.

I would have to pay a high penalty as I have a fixed rate mortgage but the potential profit seems very good notwithstanding this.

Any advice gratefully received.

Regards,

Cook_County

HMRC would almost certainly see this as a trading transaction and charge the profit to income tax. You should review the "badges of trade" concept.

travel_freak

Hi Cook County,

Thanks for your reply. I haven't heard of the concept which you mention, can you give me any further information on where to look for this at all?

Many thanks.

Regards,

WHA

Cook_County wrote:

HMRC would almost certainly see this as a trading transaction and charge the profit to income tax. You should review the "badges of trade" concept.

Not necessarily - if you have evidence that your intention was to renovate it and then rent it out, you could well have a sound argument that it wasn't trading and is a capital transaction. With the trading versus capital gains argument, it is "INTENTION" that matters not what actually happens - if the events suggest a trade, then you need evidence of your intention to prove it to be capital.

Such evidence could be (1) your BTL mortgage application which I assume clearly stated the intention to rent out (2) the fact you have an early redemption penalty which you presumably wouldn't have agreed to if your intention was to sell on quickly (3) presumably you have something written down from an estate agent/valuer etc giving anticipated rental yields (4) presumably your house buildings insurance policy was for a BTL. All this evidence stacks up in your favour and you should be OK that it is not taxed as a trade. Of course, if the paper trail doesn't say all this and you have done up another house recently or will do so again next time, the argument against trading is hopelessly lost.

Assuming it is a capital gains transaction, no there are no "roll-over" style of reliefs to put the proceeds into another project if it is domestic/dwelling property. You have to pay capital gains tax on the profit and have only the after-tax amount left to invest in your next.

The difference between trade (income tax) and investment (capital gains tax) is fundamentally important. If the HMRC view you as buying something with the intention of future sale at a profit (especially having done something to it), they will regard it as a trade and you will be liable to tax and NIC without your annual CGT exemption or taper relief. If you can prove your intention is to keep it as a relatively long term investment, then you are taxed as a capital gain on sale, when you will get your CGT annual exemption, taper relief and any other applicable CGT reliefs. So basically, you are likely to pay a lot more tax if HMRC successfully argue it is a trade rather than an investment.

Short ownership of an asset, doing work on the asset, a succession of similar transactions, all point to a trade rather than investments.

This is why most successful/professional developers keep the properties and rent them out rather than just selling them on for a quick profit - the taxes are deferred if you keep the asset and they can use the equity to borrow against for future projects. If you sell, you have tax to pay and therefore have less money to use against future projects.