Trading with property
November 2006 Tax Newsletter
If you have bought property as a long term investment, and have let accordingly, the rents received will be treated as investment income subject to income tax, and when you sell the property the gain will generally not attract business asset taper relief, nor be available for rollover relief. (Furnished holiday lets property is treated as being used in a trade and is an exception to this general rule regarding taper relief.)
There is also a particular situation where dealing in property can be considered a trade. The tax consequences can be interesting!
Property Developers
If you personally buy a property with the sole intention of realising a quick profit HMRC are likely to consider that you are a developer trading with property.
Negative tax and national insurance issues:
a. Any profit you make will be subject to income tax and you will lose the capital gains tax annual exemption, currently £8,800 per person.
b. It is also unlikely that HMRC would allow you to treat property bought and sold in this way as your home (principal private residence), even if you "moved in" for a few weeks while the property was refurbished.
c. To avoid a £100 fine you will need to register this trade within 3 months of commencement.
d. National insurance contributions will be due on profits made. Class 2 and Class 4.
Positive tax issues:
e. Losses made can be set off against other income. (Rental losses cannot be set off in this way).
f. The value of the business will attract 100% business property relief for inheritance tax purposes.
g. Pension contributions can be paid out of property development business profits and attract tax relief in the normal way.
As you can see there is both good and bad news to consider. Please call if you are considering this type of property deal, we can work out the best tax strategy to apply based on your individual needs. Leaving the call until after the event may well be too late!
