Capital gains on property to buy, renovate and sell

egg345

Sorry, there must be hundreds of questions like this but I cannot get the exact answer so hope you dont mind me asking!

We are living in rented accomodation and will continue to do so for next 3 or 4years.

We are buying a 3 bed house to renovate and sell on for £150k in need of central heating, rewiring and a kitchen to outhouse knock through to make kitchen 14ft not 9ft long!.
Our budget for work is £8000-plus £2000 contingency
We are told by 3 estate agents and looking at what others have sold for on same road it will fetch £175-£180k when sold.
So a 15-20k profit. work should take 12 weeks max.

One of us doesnt work so lowest rate tax for half and other at 40%

Does it matter how quickly we sell it on?
Will we both get our CGT exeption of £9200 no matter how quickly we sell it?

I just don't get Taper relief.

If we put in the heating have it rewired, new kitchen and bathroom, do I take the costs of those off before tax due on profit?

Please advise.

Another question - if we sold for a profit a week after buying it without doing a thing to it would we still get our CGT allowance?
We've bought privately (probate) and are told we could sell straight away for £160k (10k profit)

Sorry to go on.

WHA

You won't be liable to capital gains tax as what you are proposing is not an investment. Therefore, no CGT annual exemptions, and no taper relief.

You are buying something with the intention of selling it for a profit. It is a trade and would need to register as self employed and pay INCOME TAX and NATIONAL INSURANCE on the profits you make.

For income tax, the profits are added to your other income and taxed at your marginal tax rate - personal allowance and lower rate bands are available if not already used towards other income.

The costs you mention are allowable.

For national insurance, you have a weekly class 2 NIC liability of around £2.20 per week and also class 4 NIC at 8% on profits over £5,035.

So say £20,000 profit, £10,000 each, first person with no other income, total tax and NIC say £1,300. Other person at 40% tax, total tax and NIC say £4,500. So potentially tax and NIC of £5,800 on a £20,000 profit.

The only ways to get Capital Gains Tax treatment would be to rent it out or live in it and then sell it on. So it may well pay you to move in for a few months and then sell it on, when there'll be no tax to pay at all!

silvercar

WHA is right, if you continued to buy, rennovate and sell on. If you do this as a one off, maybe with the intention of living in it then changed your minds, the IR would probably not query it.

AFAIK updating and replacement would not be allowable against CGT (as it would qualify as a letting expense if you were renting the place out) but new additions would count. So the introduction of central heating may qualify.

You each of an allowance for CGT, £9,200 each after 5 April. You won't have owned the property long enough for taper relief. You would still get CGT allowance if you sold it the day after buying it.

egg345

Ouch! It's a mine field !!
Ok, it's a one off, we just thought we'd do this whilst renting with our capital.
Could we move in for a while and still keep our rental property?

If so, what is the absolute minimum we would have to live in it for?
Or absolute minimum to rent it for?

I don't want to be dishonest at all but at the same time don't want to pay what I can avoid not paying by planning properley, ie living in it for a bit.
It is our only owned property and the only one we have a mortgage on.

You couldn't live in it at the minute only when done or nearly done as it hasnt got any heating, wiring dodgy and needs builders in.

If its the self employed route, where to start? who to contact?
Thanks again, much appreciated.

silvercar

It is our only owned property and the only one we have a mortgage on.

This alone should be sufficient for you to say you bought a wreck with the intention of making it habitable; after all the hassle you have decided that its not for you and sell it.

Clearly if you did this repetitively you couldn't claim that this wasn't your trade, but a one off, while you are renting elsewhere, is perfectly reasonable.

egg345

Thank you Silvercar. That is obviously an option if it is viable.

When do the IR contact us anyway? After the sale of the property?

If we were to live in to do it 'properly' how long should we live in it for?

egg345

Hi

Does anyone know how long you have to live in a property to call it 'home' and be eligible for CGT allowances?

Lots of homework to do following previous replies.

If anyone else has anything to add please do!

Thanks!:T

Doozergirl

If you're doing this once then I 6 months pr more would suffice, but I should think you need to have a different reason for moving out than 'selling to cash in on the profit'!

silvercar

If you actually live in it as your principal private residence you are exempt from CGT for the time you live in it and the last three years of ownership. This would be enough to ensure that you don't have any CGT liability.

To use CGT allowances of £9,200 each as I described earlier you don't have to live in it at all. Everyone automatically has this allowance available to them each tax year.

You would include details of the gain (if you didn't move in) in your tax return for 2007-08 (presuming you didn't sell til after 5/4/07) which would be due to be submitted and the tax paid by 31/1/09!

If you do move in, there is no CGT liability and no need to declare it.

Williams_Daddy

Oh my gosh - this is a bit complicated!
I'm the same as egg345 - tried to find answers within threads but my situation is different again and nothing seems to quite fit - or I may just be being thick of course.
Perhaps I can bother anyone for some tips
So here it is:
On the subject of CGT, here's the situation:
Me and my wife jointly own everything - she is a 40% tax payer, I own a small ltd company. We have our house (house 1) that we live in as our main residential address.
We have just bought a property (house 2) for £470,000 which we intend to renovate and sell on asap. We expect to make about £20,000 on this if we're lucky.
In the meantime part of the land belonging to this property will be split off and (fingers crossed) planning permission for a 4 bed house (house 3) will be granted.
We are likely to be offered 40% of the potential value of the completed house 3 if we want to sell the land and planning to a builder. Let's say approx £220,000. As far as I can tell this will leave us liable for a CGT bill on this profit?
The alternative is to build house 3 ourselves, move in for as short a time as possible and then sell it as our primary residence and Bobs your uncle, no CGT!
But can we keep our house 1 (maybe rent it for a time and move back in as soon as the taxman is happy that we have lived in house 3 for a "reasonable period of time".
Alternatively we could keep the property and rent it out for a while but where could that rental be chanelled in order to avoid paying too much income tax ? And what's this trade thing? - that seems like a bit of a fly in the ointment...
From reading everyones posts I can see that this is something that you really have to get right as it can make such a difference. I would go to my accountant but he doesn't know the answers and wants to charge me for going off to find out (does that seem a bit off - or is it just me?!)

Anyones help and advise very much appreciated - thank you

silvercar

The purchase cost of house 2 would need to be divided between house 2 and the land for house 3. This then creates presumably some gain on house 2 and a larger gain on house 3. You would then sell house 2 in a different tax year to house 3 so you can use your CGT allowance on both.

I would expect that, as a one off, you can do this all through capital gains rather than trading. Keep repeating the exercise and it will look like a trade. Moving in to house 3 reduces the likelihood of the revenue considering you trading further.

Moving in to house 3 and renting house 1 would work for house 3, it would create a small amount of liability for house 1 but I would guess that would be a small percentage of the total time you have owned it.

Finding an accountant and engaging them for advice on this exercise for inclusion in your tax return seems more sensible than paying your current guy to find things out. Have a look on landlordzone.co.uk forum for tax advice -there are tax accountants who post on there who may take instruction.