Reply to: Proprty refurbishment. Best set up

[ChimpMaster]

Yep, I know there will be no income tax, I was hoping there wont be any 18% CGT also.

There won't if you buy the property as tenants in common with your wife/husband and profit is £22,200 or less for the year.

[kolata]

This is elementary taxation so it'd be easy for someone to chastise you for not knowing this already, but I suppose at least you are trying to learn before diving into a property deal.

On your example above, there would be no income tax payable and 18% CGT on the 7900.

Yep, I know there will be no income tax, I was hoping there wont be any 18% CGT also.

[ChimpMaster]

Thanks guys.

One interesting question for accountants.

If a person buys a property and renovate it. Rent it out for 6 months @ 500/mt. Then sell it for 19 000 more.

The person has no other income that the rent - £3000
Taxable gain is 19000-11100 = 7900

However if your income (rent + taxable gain) is less than 11000, do you still pay 18%@7900?

This is elementary taxation so it'd be easy for someone to chastise you for not knowing this already, but I suppose at least you are trying to learn before diving into a property deal.

On your example above, there would be no income tax payable and 18% CGT on the 7900.

[northernladuk]

I don't think accoutants dare post in this section TBH.

[kolata]

Thanks guys.

One interesting question for accountants.

If a person buys a property and renovate it. Rent it out for 6 months @ 500/mt. Then sell it for 19 000 more.

The person has no other income that the rent - £3000
Taxable gain is 19000-11100 = 7900

in hmrc's example:

Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,100.

First, deduct the tax-free allowance of £11,100 from your taxable gain. This leaves £1,000 to pay tax on.

Add this to your taxable income. Because the combined amount of £21,000 is less than £31,785 (the basic rate band for the 2015 to 2016 tax year), you pay Capital Gains Tax at 18%.

This means you’ll pay £180 in Capital Gains Tax.

You pay 180 in CGT.

However if your income (rent + taxable gain) is less than 11000, do you still pay 18%@7900?

[RetSet]

I CBA giving a full reply, buty if you buy/ renovate/ sell that's trading, so no CGT allowance.

Look for property related forums on facebook

Go to your local PIN - Property Investors' Network, or PPN - Progressive Property Network meetings.

Educate yourself. That won't happen here.

HTH

[ChimpMaster]

Are you saying that buy/refurb/sell in 2 months for X profit, the profit is income and taxed as such and not CG? CORRECT
But buy/refurb/rent/sell in 6 months for X profit and Y rent, the X will be CG (CGTA applicable) and the Y will be income and taxed? CORRECT
How is primary residence defined? I have house 1 as prim res now. Buy house 2 (pay 3% SDLT) and move to it, so house 2 is now prim res. Sell house 2 in 2-3-6 months. What about 3% SDLT?

Any citation?

Primary residence terminology was perhaps misleading. If you already own another property (your own residence or BTL) then you will pay 3% SDLT surcharge on any further purchase. You cannot escape it in this case and investors are having to price in the extra tax to see if the numbers still work. Reduce your offer if the numbers don’t work.

[WTFH]

(Although the 3% levy is based on owning more than one property, not based on whether it is your primary residence or not, according to the government website)

[WTFH]

Are you saying that buy/refurb/sell in 2 months for X profit, the profit is income and taxed as such and not CG?
But buy/refurb/rent/sell in 6 months for X profit and Y rent, the X will be CG (CGTA applicable) and the Y will be income and taxed?
How is primary residence defined? I have house 1 as prim res now. Buy house 2 (pay 3% SDLT) and move to it, so house 2 is now prim res. Sell house 2 in 2-3-6 months. What about 3% SDLT?

Any citation?

You would be best to speak to your accountant with actual figures, rather than discussing theoretical scenarios with a bunch of contractors.

[kolata]

There will be a reason it's cheap....... Do you mean it's appropriately priced for the condition it's in?

Let say it needs refurb, and the price will rise £15-20k after that.

[kolata]

Property "buy/refurb/sell" profit counts as income tax i.e. no CGT allowance.

Unless you hold it for a while & rent it out, in which case it seen as an investment and hence liable to CGT at 18% or 28% depending on your overall income for the FY.

So you either hold it and rent it out for 6 months or so, or use a separate Ltd Co for this purpose, or keep your income from other sources as low as possible and allow the property sale profit to be chargeable under income tax.

You cannot claim SDLT back unless it's your primary residence.

Also check the remaining lease length on the flat. Too low and it'll be hard to sell unless you get it renewed at purchase.

Are you saying that buy/refurb/sell in 2 months for X profit, the profit is income and taxed as such and not CG?
But buy/refurb/rent/sell in 6 months for X profit and Y rent, the X will be CG (CGTA applicable) and the Y will be income and taxed?
How is primary residence defined? I have house 1 as prim res now. Buy house 2 (pay 3% SDLT) and move to it, so house 2 is now prim res. Sell house 2 in 2-3-6 months. What about 3% SDLT?

Any citation?

[ChimpMaster]

Property "buy/refurb/sell" profit counts as income tax i.e. no CGT allowance.

Unless you hold it for a while & rent it out, in which case it seen as an investment and hence liable to CGT at 18% or 28% depending on your overall income for the FY.

So you either hold it and rent it out for 6 months or so, or use a separate Ltd Co for this purpose, or keep your income from other sources as low as possible and allow the property sale profit to be chargeable under income tax.

You cannot claim SDLT back unless it's your primary residence.

Also check the remaining lease length on the flat. Too low and it'll be hard to sell unless you get it renewed at purchase.

[northernladuk]

There will be a reason it's cheap....... Do you mean it's appropriately priced for the condition it's in?

[scooterscot]

Buy Deutsche Bank shares with that capital instead. It's going to shoot up now that the Germans have made it clear it's 'too big to fail'.

[GB9]

Hi all

we found a cheap flat that needs renovation. It is very poor state, but has good potential.

What is the best setup to approach that given

we will by in both our names - husband/wife. We can utilize capital gains of up to ~£22 000 per tax year tax free. The profit will most likely be < £22000.
we have another property - 3% "fine" for 2nd home payable
we pay with our saved money (i.e. all taxes have been paid)

How do we approach this whole thing?

As personal investment - so we pay property price + stamp duty + renovation labour + materials = total cost. And then hope to sell for total cost + X where X < £22000 so no CGT.

As some kind of legal entity (ltd, ??), so we can claim the costs for renovation (and purchase?) and subtract from the profit after sale.

What is the most tax efficient way?

PS. If you have 1 property (property 1), buying a second one will cost you 3% more as SD. However if you sell the second property after say 6 months can you claim the 3% back. I know you can if you sell property 1 within 18(24) months, but can you do the same if you sell property 2?

You have 3 years to sell your additional property.

My understanding is that cgt is personal so using a company would be outside that. You can deduct legitimate expenses from cg if they are valid.

Have you tried your accountant? They should know the correct answers.