Selling Properties - Income or Gains?

I have been speaking to several clients this week including a potential new client who is starting to get involved in property development and needed strategic advice concerning how to minimise his tax liability on these transactions including which structure to use etc. and whose own accountant had in his own words “given him a blank stare”.

From a tax perspective, problems can arise in that it is not always crystal clear whether a person is investing in property or trading as a property developer. This is a very important distinction as it determines how any profit on the eventual sale is taxed. In the case of an individual, a gain on an investment property would be taxed as a capital gain whereas profits made by a person trading as a property developer would be liable to income tax. In our current climate where capital gains tax rates are considerably lower than the highest rate of income tax, the attraction of realising a capital gain is apparent however there are severe consequences in getting this wrong.

Whether a person is trading is a question of fact and the normal ‘badges of trade’ apply. The starting point for deciding whether one is dealing with a trading or investment situation is the intention of the owner at the outset. Thus if you have a couple of properties you have bought to sell for a profit HMRC could deem this as trading and you would be subject to Income Tax on the sale.

HMRC have the power to go back from the start of your transactions and issue penalties and interest on the unclaimed tax amount.

I explained these various issues and options available to the new client and we set up a meeting to discuss matters further. I am pleased to say he was very happy with the initial advice and wishes to move all his tax affairs over to me. I will be setting up a property company for him as he will be making regular transactions in property over the next few years.

If you would like to discuss your own situation please email me for a free consultation.

mitch@ljd.uk.com

Generous tax reliefs available if you own a second property !

People that own a second property always ask me for ways to reduce their potential tax liability if they were to sell it. Here are a few useful tips.

If you own a second property you could be liable to pay capital gains tax on the sale of this asset at the rate of 18 or 28%.

I advise my clients with ways to reduce the potential tax liability on the sale significantly which sometimes results in the client having to pay no tax.

There are reliefs available such as lettings relief which if structured properly exempts the first £40,000 of gain, if your partner is named on the property he/she will be entitled to an additional £40,000 exemption as well. There is also the 36 month rule of deemed occupation which you pro rata the time period in which you own the property and thus final 3 years could be exempt. As well as a few others.

There are some real generous reliefs out there, however in order to obtain them you need to make sure that the second property was at some point your principle private residence and it has been subsequently rented out.

The tip is when you buy a second property make sure you move into it and live there for a decent amount of time. Then you will qualify for these generous reliefs and potentially save thousands of pounds.

The reliefs are complicated to work out and you will need to speak with a Tax advisor. If you or your clients own more than one property I can help you save money.

A good referral for me today would be anyone you know who has a rental property, I can help manage the accounts as well as structure a way to save tax

Contact me for further info mitch@ljd.uk.com

Why Pay 20% VAT? When You Should Pay 5%!

The 5% reduced rate of VAT was introduced almost 10 years ago on 1st April 2001. However not many people are aware of it. The 5% relief is given in two main area, the first being the renovation of an empty dwelling and the second being a conversion in respect of the number of dwellings.

If an existing residential property is renovated, after it has been empty for at least 2 years, the builder should charge 5% VAT for his services. This could apply to a builder renovating a domestic property or alternatively for a potential investor who is buying an empty property renovating it prior to renting it out.

The key thing to do if this applies to you is to obtain credible proof that the domestic property has been empty for 2 years. In practice many builders do not charge the correct rate of VAT in these circumstances.

Examples of changing the number of dwellings include:
- Conversion of a restaurant into a house
- Conversion of 1 house into 2 flats
- Conversion of a barn into a house
- Converting an office into a dwelling

If your builder has charged you incorrectly he should correct the position by issuing a credit note to reduce the amount of VAT. There are also certain forms you can obtain from HMRC for errors on VAT returns.

It is amazing how many property developers do not know about this as potentially it could save them thousands of pounds.

For more information please feel free to contact me mitch@ljd.uk.com