CGT on Renovated Property - Cost of Tool Usage

OhJustSomeGuy

My town has some of the cheapest property prices in England. Occasionally the council sell off some of the older stock when they become too rundown and expensive to bring back into use for the next tenant. I went to their auction with an eye on the cheapest flat, but it was so nasty that no bids were made. After the auction I put my life savings together and made an offer which they accepted.

I renovated everything myself (apart from the final connection of appliances to the gas). It took me almost 5 years! With the council tax rate reaching 400% in the final year, I was lucky to have not made a loss for my 5 year's hard labour. It was mainly rising property prices which saved me.

Anyway to the point...

I understand I can reduce my CGT liability by offsetting the cost of renovation. Would this include tools I had to purchase to do the renovation eg. plastering trowels?

I'm guessing not. However, if I resell those tools at the end of the project for less than I paid for them, the difference in price would more accurately represent the real cost of renovating. Can I claim the difference if I have receipts for buying and reselling tools?

I assume if I had hired tools I could claim for this?

Jeremy535897

The question is whether this was a trade, or whether it was a capital gains tax matter. As a trade, you could have offset all your costs, including the depreciation of tools, but you should have registered as self employed when you bought it. As a capital gains tax matter, the rules are much more strict on what you can claim, but the tax rate is likely to be lower. Did you ever live in the property as your main residence? I am guessing not, given your comment on council tax.

OhJustSomeGuy

Hi Jeremy,

Yes you're right, nobody ever lived at the property while I owned it.

I'm registered as self employed due to selling things on eBay, though I've always filed Self Assessments as a 'retailer'. I assume this cannot be used regarding the property renovation due to being a different category?

If I had registered as a trade, could I have offset the cost of council tax on the empty property?

[Deleted User]

That would be two entirely separate trades. You cannot sell items on eBay as one trade and set expenses against it from another.

Jeremy535897

The question is whether you are subject to capital gains tax, income tax as a trader, or income tax under the anti-avoidance legislation in part 9A ITA 2007. In my view, someone who buys a derelict property with the intention of doing it up to sell at a profit, and neither lives in it nor ever wanted to live in it, is a trader. Your problem with that is that you have not actually declared the results of that trade on previous tax returns.

Whether that is a major issue is debatable. Normally in such a case you would treat all the expenditure on the fabric of the property as adding to your trading stock, and you would end up with a loss each year based on things like council tax, electricity etc that add nothing to the property. You could also claim the costs of tools. Ultimately, when the time came to sell, you would then take the price received, plus the market value of the tools, and deduct the trading stock and current year expenses, plus the losses that you would have brought forward from previous years (council tax etc). You then pay income tax on the difference.

If the matter is dealt with purely as a capital gain, you should be able to claim a lot of the expenditure on the fabric of the property, but not expenses like council tax, or the cost of tools used. There is more guidance here:
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030

If I were you I would seek the advice of an accountant.

OhJustSomeGuy

Thanks Jeremy.

Unfortunately (in hindsight) - I avoided using water, gas or electricity until the final few months just to save on costs. Carrying a heavy water container in the back of the car then up two flights of stairs, carrying heavy radiators home to flush out then bring back, restricting myself to using only battery and manual tools, rewiring the property 'blind' with no electrical supply to test as I go. All these things and more made a significant contribution to it taking me nearly five years.

If only I knew earlier that I could have offset these costs....

There are only have a few days left to pay the CGT, so will try to book a session with an accountant and hope it will be possible to adjust previous years' SA to add in the losses.

Jeremy535897

I would do so urgently. The 60 day reporting rule should not apply if your accountant agrees that it is a trade, for the simple reason that then there is no capital gains tax to pay, but rather income tax. Just when does the 60 day time limit expire? It is helpful that you have already registered as self employed for another trade, so have not missed a deadline for doing that, and that clearly no profit could have arisen until you sold the property. I would ask out of curiosity how you got the rewiring passed under Part P of the Building Regulations.

You can set losses against other income, and this is something else to discuss with an accountant, although the earlier claims may be out of time, and it may be that you don't need to, if your other income has covered by your personal allowance. I should also ask whether you use the cash basis for your other self employment, because that will determine whether or not you use the cash basis for this trade (you can't mix and match in a tax year). You can only amend 2021/22 online. Earlier years will require a letter to HMRC.

OhJustSomeGuy

The 60 day time limit expires April the 7th, but I'd always planned to pay before the end of the tax year due to the change in the CGT allowance next tax year (as I'm not sure if it's based on the date I received the proceeds of the flat sale, or the date I pay the CGT). I've never used an accountant before, but there's one in my town I'll visit on Monday with my figures for the flat and last 5 years' SA. I don't use the cash basis method for SA.

Regarding Part P, when it came to selling I was asked for a BS7671 certificate - which got me into a bit of a tailspin. Eventually I approached the electrician who I had previously paid for an EIRC, I asked if he could produce a BS7671 certificate - and he pointed out it's the same document as the EIRC.

[Deleted User]

The tax due is based on the rates and allowances applicable at the date when the sale became unconditional - generally when contracts were exchanged. In your case that would be 2022/23.

Jeremy535897

There is an anomaly regarding the online reporting rule. If you and your accountant decided that on the facts your project was a capital gains tax matter, and you managed to file your 2022/23 self assessment tax return by 7 April, you could avoid completing the online capital gains tax property return, and you would have until 31 January 2024 to pay any tax. That might not be practical though, and if this is an income tax matter, the 60 day rule does not apply anyway.

Yes, an EICR would do the job, although you normally have to involve the electrician early so that he can see where the wiring is and that it follows the Part P rules (which are mostly common sense anyway).