70+ years
of legal expertise

70+ years
of legal expertise

Property developers need to be mindful of Capital Gains Tax

Property market commentators are divided on whether 2024 will see a further dip in house prices, while buyers play wait and see on the mortgage market.  

Meantime, many amateur property developers are once more being drawn into the sector, with the lure of fast profits to be made while the market is slow. 

While the internet is full of property gurus offering ‘expert’ guidance on making money from property, few mention the tax bills that investors may encounter if they are successful in building a portfolio or ‘flipping’ property by adopting a fast-turnover approach of buying, renovating and selling. 

When there is a gain on the sale of a property that is not someone’s main private residence, they may find themselves with a bill for Capital Gains Tax (CGT) if it exceeds their annual allowance. 

CGT is due when an individual sells an asset and makes a gain on the original price, with tax on the gain payable at a rate of 18% for basic rate taxpayers and 28% for higher rate taxpayers. 

Generally, CGT is not due on property where it is someone’s main home, but the tax could become due if a property is sold or transferred for a profit within 36 months of being bought. The aim is to guard against using short-term property ownership to evade tax obligations. 

And even if capital gains tax is not due, if property is being renovated and sold on for profit in a fast turn-around, investors are likely to find themselves paying income tax when the development may be considered as their ‘trade’.

Two recent cases brought by HMRC highlight the dangers of being tax-ignorant when it comes to property investing and development.  

One saw a homeowner faced with a £1 million bill for income tax and penalties on profits from buying, renovating and selling three properties within five years. HMRC argued his activities had the hallmarks of a property development trade, meaning the gains would be taxable as trading profits.

Although Gary Ives was a builder, he maintained that his work was on a smaller scale than these major renovations and that the fast turnover was due to family and financial issues, not the desire for trading profits.

He successfully appealed to the First-Tier Tax Tribunal, also avoiding capital gains tax on the disposals, showing that all three properties were used as family homes and each house was furnished and occupied with the intention of residency being permanent.

Less successful in his appeal was Mark Campbell, who made £260,000 on buying and renovating four properties in five years. He lived at one of the properties for nine months, when it was already up for sale, but claimed he was entitled to private residence relief because he was living in job-related accommodation elsewhere, to take care of his father who suffered from dementia. 

The Upper Tax Tribunal dismissed Campbell’s argument that he was entitled to private residence relief,  which meant CGT was due on the gains, although they disagreed with HMRC’s claim that he was trading as a property developer.

Salv Sole, Head of Commercial Property at KWW Solicitors, said: “It’s certainly an area of taxation that is misunderstood or simply overlooked. There is even confusion over what exactly is meant by ‘flipping’ a property. 

“It’s used to describe making a quick profit on a fixer-upper but it is also used frequently to describe when someone assigns another property they own to be their principal private residence, which my friends in the tax world say can be a useful planning device to maximise the available exemptions for capital gains tax.”

Those owning second homes or buy to let property who are anticipating a sale in the next year or two, may consider bringing forward the timing of the disposal to beat the reduction in the tax-free allowance for CGT. The allowance reduced in 2023-24 from £12,300 to £6,000 and falls to just £3,000 in 2024-25.

IMPORTANT: This article is neither legal nor financial planning advice. It is intended to provide information of general interest about current legal issues. You should always consult with a specialist for formal advice.

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