25th June 2008, 04:56 PM
Capital Gains Tax on house bought for renovation
Could you please explain the ins and outs of capital gains tax when buying a house to renovate, then selling it on at a later date? I don't own any another house but was wondering if it was better to have just one name of ownership or to have other members of my family as joint owners.
Thanks in advance.
26th June 2008, 10:50 AM
Welcome to the site lamppost7. Our tax expert is at a conference for two days but we will get an answer for you early next week. Sorry for the delay. Ed.
27th June 2008, 02:24 PM
George Bull, Head of Tax at Baker Tilly, replies:
Generally, any gain made by an individual on the sale of his or her private residence is exempt from capital gains tax. The exemption is not available if the property was acquired for the purpose of making a gain on its disposal.
You do not have to pay capital gains tax provided:
- you bought the property, and made any expenditure on it, primarily for use as your home rather than with a view to making a profit
- the property was your only home throughout the period you owned it (ignoring the last three years of ownership)
- you did actually use it as your home all the time that you owned it and, throughout that period, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger
- the garden and area of grounds sold with it does not exceed 5,000 square metres (about one and a quarter acres) including the site of the house
Alternatively, if the property was bought to renovate and immediately sell for a gain, HMRC could argue that a ‘trade’ of buying and selling properties is being carried on, which may mean that the ‘profit’ on disposal is taxed as income.
Sharing ownership with other people may help if any gain is taxable and they have surplus allowances and reliefs, but this is a complex area so specific advice should be sought before any decision is taken and acted on.
1st July 2008, 12:32 PM
Ronnie Ludwig, a Partner in the Private Wealth Group at Saffery Champness, says:
The project could be viewed in two ways, depending on the original intention at the outset. If the house is to be used as a residence, either for you or as a rental property, then the eventual sale will be a capital transaction and taxable under capital gains tax rules. However, if the house is purchased with the intention of renovating and selling immediately then it is likely that this will be viewed as a trading transaction and will therefore be taxed as income.
In general terms, the sale of a person’s main residence is exempt from capital gains tax. Therefore if you are purchasing the property with a view to living in it throughout your ownership of it and renovating for your own enjoyment then there will be no tax arising on the sale. This relief only applies to individuals who own and reside in the property and any joint owners living elsewhere will pay capital gains tax on the profit on disposal at 18%, subject to the availability of the annual exemption.
If the venture is a trading transaction, you will need to register as self employed with HM Revenue & Customs (HMRC). Even if you live in the property, if the purchase and subsequent sale are purely for a profit motive, earnings will be subject to income tax at your marginal rate which could be as high as 40%. In addition, National Insurance Contributions will also be due.
If there are joint owners, this will mean the venture is a trading partnership. Both the partners and the partnership and will need to register with HMRC and complete tax returns. The profits of the transaction should be shared between each of the partners and each partner will be taxed on their share of profits. The overall tax liability could be reduced if the other owners’ level of income is such that they pay tax at the basic rate of 20%.
You will see that the tax position depends on the facts of the situation and it is therefore crucial that professional advice is taken.