CGT on property development

jong1980

Evening all

Just wondering if someone on here could enlighten me as to a Tax query I have, or advise the best way forward.

Myself, Brother and Sister are buying a house off my grandmother who has now had to go into a home due to be incapacitated. Our incomes are £28k, £55k and £75k respectively

We are buying the house for £200,000 via a joint mortgage between the three of us. Its in a completelt decrepid state, and after consultantion with a builder, architect, planner and estate agent we believe that for a £150k investment we should be able to sell the house for £550k, and split the profit 3 ways.

My brother owns his own house and lives in it, my sister owns a house which I rent out and she rents in London, I don't own a house and rent off my sister.

This is our first step (and probably last) into development, so when it comes to CGT I/we don't have the foggiest what is the best way to proceed, and how it will be calculated.

Basically I need any advice possible to reduce the amount of CGT applicable, or what we would be looking at paying in CGT, whether as a group or individually.

Would it be possible for me to live in it for 6 months then sell and use it as my main residence? Would the profit be split 3 ways and then CGT paid on it dependant on our tax brackets? I haven't a clue!

Also, would it be worthwhile registering as a compnay so we could claim VAT back, but then what would happen about tax? Would it then be classed as income tax, and could this be reduced via dividends?

As you can see I have not got a clue, so as I said any info or advice would be appreciated

Cheers

Jon

CLAPTON

the basics are as follows

the capital gain would be 550k less purchase price 200k and less the cost of improvement 150k giving gross profit of 200k
you can always deduct cost of buying and selling

the profit is split three ways
so 200/3 each i.e. 66.6k each
you have a CGT allowance of 9.2k although may be higher when you sell but that gives
57.4 K profit per person
you pay a flat tax at 18% so tax payable per person = 10.34k

If you truely lived there are a period as your principal private residence then you would be allowed the period of residence plus 36 months so you would pay zero tax.
However the other two would have to pay cgt as above.

If married, they could give half their share to their spouse before any sale and so use their spouses 9.2k cgt allowance.

I have no idea about benefits or otherwise of setting up a company.

Cook_County

As a property development HMRC are likely to argue any profits will be liable to income tax - not CGT.

There is no solution for professional advice here ...

chappers

I am in the process of doing just what you are doing and my accountant has said just that it will be basically taken as an income tax issue. I too thought of setting up a Ltd company but the situation is then that the profit gets trapped in the company and you will be taxed when you take it out anyway, either personnally as salary or through corporation tax on dividends.
Not worth it for a one off development.

jong1980

Cook_County wrote: »

As a property development HMRC are likely to argue any profits will be liable to income tax - not CGT.

There is no solution for professional advice here ...

Thanks, thought that would be the case, but hoped not!

So how would the income tax be paid? Is it a case of an all in one figure of my salary + the profit - circa £80k, or would it be calculated in two seperate cases?

Also, would it be worth setting up as a vat registered company, as Im guessing the income tax would be the same, but then we could claim the VAT back?

I am going to seek professional advice, but any advice at this stage would be welcome

Pennywise

Being VAT registered and being a limited company are two completely different things. You can be VAT registered without being a limited company and vice versa.

Don't assume that you can reclaim the VAT just because you're vat registered. Normally, the sale of a dwelling house is exempt from VAT, meaning that there are no taxable supplies, and therefore no way of reclaiming VAT paid to suppliers and contractors etc. To reclaim anything, you'd need the house to be a zero-rated supply at the point of sale, and to do this, you need to satisfy HMRC criteria - if you have a spare year or so to read up on it, there are a couple of very informative (and very long) guides on the HMRC website, "VAT and land and property" is probably the best place to start and then link to others as necessary. Like I say, though, I think you're barking up the wrong tree to think that you'll be able to reclaim the VAT you pay, but it does depend on your particular circumstances.