CGT or INCOME TAX on property

justjohn

If you buy a house, renovate then do a deed split off and sell the house but keep an attached workshop via deed split off. Is CGT due or income tax?

Same scenario as above, But house is rented for X then deed split off. How long does X need to be before CGT is relevant?

justjohn

Anyone??

bump

jimmo

Putting the “deed of split” aside for the moment, the acts of buying a house, doing it up and selling it have all the hallmarks of trading or an adventure in the nature of trade and any profits will be chargeable to Income Tax.

However, buying a house, doing it up and letting it effectively turns the buying and doing up into a capital investment in a lettings business. Then, any future profit from the sale of the house will become a Capital Gain.

When the taxman looks at these things the real question is your intention when buying the house.

In many ways the length of time you let a property for is not as important as your ability to demonstrate the intention of letting.

If you can demonstrate that that you have tried to let it on a reasonable commercial basis, have failed to find a tenant, given up and sold up that will be fine and it will be a Capital Gain.

If you can demonstrate that you actually let the house to a tenant from hell and consequently lost your appetite for the lettings business that will be fine.

If you think you can simply say that you bought the house to do up and let but when you had completed the doing it up stage you changed your mind and decided to sell up, please think again.

Coming back to your “deed of split” if you can successfully arrange your affairs so that your profit from the development of the house is a Capital Gain then the timing of the split is probably not too important.

However if you prove to be trading as a property developer your original purchase of the property will be a purchase of trading stock.

Then, following the principles of the Tax Case of Sharkey vs. Werner your appropriation of trading stock will be at retail value.

In other words you could make a taxable profit from selling the workshop to yourself.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM33630.htm

In that case the timing of your “deed of split” depends entirely on whether the value of the workshop goes up or down in the future.

I would suggest that splitting the property as early as possible would be your best bet.

justjohn

jimmo wrote: »

Coming back to your “deed of split” if you can successfully arrange your affairs so that your profit from the development of the house is a Capital Gain then the timing of the split is probably not too important.

However if you prove to be trading as a property developer your original purchase of the property will be a purchase of trading stock.

Then, following the principles of the Tax Case of Sharkey vs. Werner your appropriation of trading stock will be at retail value.

In other words you could make a taxable profit from selling the workshop to yourself.
http://www.hmrc.gov.uk/manuals/bimmanual/BIM33630.htm

In that case the timing of your “deed of split” depends entirely on whether the value of the workshop goes up or down in the future.

I would suggest that splitting the property as early as possible would be your best bet.

I understand most of what you have said, however if the house comes under CGT. Surely me retaining the workshop and timing of split-off, is irrelevant?

jimmo

Yes you are right but I think I said something very similar in the first paragraph of the part of my reply that you quoted.

However, if I were in your shoes, I would look to separate the house and the workshop as quickly as possible after the initial purchase.

You need to remember that the tax system is Self Assessment and you are more likely to convince yourself that when you sell the house it will be a Capital Gain rather than trading income and make your Return accordingly. However you are in no position to judge whether your Self Assessment will be accepted by HMRC or the taxman will come snooping.

If he doesn’t, all will be well. If he does how will you cope?

At this stage you clearly need to budget for the Capital Gains Tax that you anticipate but you also need a Plan B in case the taxman comes snooping. How will you cope if the taxman wants Income Tax rather than Capital Gains Tax?

Back to the workshop. One way or another you need to separate it from the house. Regardless of when you do it, it is going to cost. If you do it early how much will it cost? If you do it later will it cost any less and will you be exposing yourself to additional Income Tax liability?

Dal_Whinnie

jimmo wrote: »

Putting the “deed of split” aside for the moment, the acts of buying a house, doing it up and selling it have all the hallmarks of trading or an adventure in the nature of trade and any profits will be chargeable to Income Tax.

.

Surely that depends on your original intention. If this is a one off (in order to acquire workshop) then I would expect it to fall within CGT with the costs of enhancing your asset also being allowable.

If it falls withinCGT you will need to apportion your costs between the house and workshop so you will need a valuation of the two parts