Property development - PRR & CGT

wilko_1984

Hi guys,

I am currently in the process of buying a plot which I shall be demolishing the existing house and building 2 new houses on.

To fund the build, I shall be letting my current property out and living in temporary accommodation on the new plot(s).

It is my intention to sell both of the new build properties and use the profits to fund other developments. Of course, I want to pay as little tax as legally possible.

My first thoughts were that I'd build new house no.1 and as soon as this is complete sell it to fund new house no.2. But I guess I'd then have to pay CGT on this?

The next option is the same as above, but instead of selling straight away, live in for 6 months and then sell. This i understand would qualify me for full PRR.

However, I'm very keen to build both at the same time, sell them and move onto the next development. This would mean that I would need more capital upfront (which I could source) but I envisage that I would have turned the whole project around in under a year. Of course, I would be liable for CGT on all of the profit.

I will be maintaining throughout my current full time job. I am a 40% tax payer so I also understand that I'd be liable for a higher % of CGT on profits above my tax free threshold. My other half is a 20% tax payer. The profits would be split 50/50 although the new properties are not currently in her name.

My question is.... if I said to HMRC that I was going to build it so I could take full advantage of the PRR and therefore pay no tax. But the alternative would be that I develop both - is it possible I could negotiate more favourable tax?

I anticipate each property would make £100k net profit.

Any advise much appreciated.

CLAPTON

from waht you say it's likely that HMRC will consider that you are in trade as a builder/developer and
so you will be taxed as income tax

wilko_1984

CLAPTON wrote: »

from waht you say it's likely that HMRC will consider that you are in trade as a builder/developer and
so you will be taxed as income tax

Hi Clapton,

Thanks for the advice.

BR

Wilko

00ec25

yes, CGT is not the issue for you, you'd be held to be trading as developer so Income Tax for everything

wilko_1984

The other option we are considering if remortgaging and renting out on completion.

I understand that no tax is payable when you remortgage, is this correct?

CLAPTON

wilko_1984 wrote: »

The other option we are considering if remortgaging and renting out on completion.

I understand that no tax is payable when you remortgage, is this correct?

which property

but in general remortgaging isn't a tax issue

00ec25

remortgaging is not a "disposal event" and therefore has no relevance to CGT

if you rent out on completion your tax position would be deemed to be CGT as you would be investing to run a rental business not to sell on, so

CGT
you will be liable to CGT on the differnence between what you eventually sell it for and what you originally paid to biuild it

there is no legally defined period for occupation, 6 months is an absolute urban myth. If you move into it before selling it you can claim PRR but only for the period you actually live there plus the last 3 years you own it (but NOT combined if they overlap).

Occupation will be tested on the facts of how you live there, not for how long you "live" there

Income tax
obviously you will be taxed on rental income

00ec25

wilko_1984 wrote: »

My other half is a 20% tax payer. The profits would be split 50/50 although the new properties are not currently in her name..

BTW if you are legally married to your OH then tax law dictates that the profits will be split in accordance with who owns what, she would therefore have to be an owner

of not married then you can split the profits anyway you wish

Pennywise

Not just income tax, but also class 2/4 national insurance on trading profits if over the exemption thresholds (~£5k,£7k) if you proceed with your stated aims to buy, develop and sell as quickly as possible. It's got all the badges of trading, rather than being an "investment" or your "home".

You may get CGT treatment (and better PPR) if you moved into the house as it stands for a decent amount of time and lived in the whole house and your PPR (6 months is good). Then you'd be doing part disposals of your only/main residence. You may also get capital treatment if you intend to keep and rent them rather than sell them.

But, if you're a "trader" you get more allowable expenses as opposed to capital, so the higher tax/nic may be mitigated by lower profit due to more expenses being allowable.