It’s all about you

We support you and your business at every stage with expert advice that delivers outstanding results.

We provide audit, accounting, tax and business advice to individuals, family, and owner-managed businesses from across our offices in Leeds, Newcastle and York.

This article appeared in the Yorkshire Post on Saturday, 22 August, 2009

What the television property programmes don’t tell you

David King is a Tax Consultant with Garbutt & Elliott Chartered Accountants and Tax Advisers, with offices in Leeds (telephone 0113 273 9600) and York (01904 464100).

Lets consider the situation where someone who is not trading as a property developer, acquires residential property and at a later date, perhaps after a programme of improvement works, sells at a profit. 

In recent years there has been a host of television shows in the field of residential property improvement and development.  While the housing market was booming this was very much flavour of the month, but in recent times as the market has gone into reverse this is an area where there has been much less activity.  However, as brighter times appear to be around the corner, perhaps now is a good time to consider the way in which the profit on a sale of property is taxed.  Sadly, this does not figure very prominently in said television programmes!

As in a lot of situations, the treatment for tax is not at all clear cut, and the facts of each individual case have to be considered carefully.  The key issue in trying to establish the tax treatment is to work out the original motivation for the purchase of the property.  Was it acquired to be held as an investment to generate a rental income stream or was it bought to make a profit from its resale?  The reason that you need to distinguish between the two is that for a profit made on selling an ‘investment’ the capital gains tax regime applies, whereas a profit made on a ‘dealing’ transaction is taxable as income. 

Capital gains of up to £10,100 in a tax year are tax-free, with a rate of 18% applying on gains beyond that amount, compared with a top rate of 40% income tax, which it is proposed becomes 50% after April 2010.  Clearly, there can be a significant difference in the tax take depending on which side of the fence a property sale falls.  In most cases a taxpayer will have a lesser tax liability if a profit is taxed as a capital gain rather than as income.

It is acknowledged that to some extent all properties are bought with an expectation of a profit on a sale at some point in the future, but the key is whether this is the main reason it was acquired. Clearly there is little doubt that the longer a property is let, the stronger the case that it is an investment.  Conversely, where a property is bought and sold quickly for a profit after a refurbishment, HM Revenue & Customs would generally seek to tax this to income tax as a dealing transaction. 

The main difficulties arise in those cases where there is a programme of improvements to the property and a period of letting, followed by a sale at a profit.  In these cases, if the owner is seeking ‘capital gains’ treatment, the motivation for the purchase is likely to come under the spotlight.  Therefore it is important that you are able to provide some evidence in support of the claim that it was an investment.  For example, it may be that the sale occurred sooner than planned, perhaps because there was an urgent need to release some cash, so although it was originally planned that the property would be kept longer-term, there was a forced sale due to a change of circumstances.

Although there is no hard and fast rule on the length of ownership that would need to be achieved to secure capital treatment, as a guideline you would not expect a Revenue challenge if it were held for more than four years after completion of any development work.  For a period of less than three years there is every chance the Revenue would seek to charge the profit to income tax.

The taking out of short-term financing for the purchase and refurbishment work is also a strong pointer towards a ‘dealing’ transaction, as the expectation is that the property will have to be sold quickly to clear the debt.  

Where you have some expertise as a builder or property developer the Revenue are often likely to contend that your motivation was to resell at a profit, but this should not necessarily be conclusive if there was a genuine investment motive. 

The taxation of property transactions is a complex area and you are strongly advised to seek professional advice if you are affected by any issues in this article.