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Developing a property and selling on? Know your tax.

When you buy a property, develop it and sell it on there are tax issues to consider. They are both substantial and can catch you unawares if you don't know about them.

Income Tax

If you are in the 'habit' of buying property, developing it and then selling it on you may unexpectedly find, in the eyes of tax legislation, that you are in the 'property development trade'. This means a trade that: consists of, or includes buying and developing for resale, residential or non-residential property; and is run on a commercial basis with a view to profit.

The consequence of this is that the money you make on the sale will not be charged to capital gains tax (which can be 10% - 28% dependent on various factors) but on income tax (charged at the higher levels of 20% - 45% dependent on various factors).

Buying a house, living in it, working on it and at the end feeling that this wasn't your dream home anymore OR that you now require more bedrooms and space for your growing family is unlikely to be caught out by this rule. But if you are repeatedly doing this then you need to watch out, it may well be queried by HMRC.

Capital Gains Tax

Taking an example: Many people will start with a 'doer upper' for their first home, mainly due to house prices and borrowing restrictions. It starts as a dream but for many the reality soon bites. The property is finished, sold and no one ever actually 'lived' in the property because they were camping down with the parents.

It was your only house. It was going to be your family home. A large gain was made on the disposal of the property and you claim 100% principal private residence relief.

The issue here is that the property was never 'lived' in and was therefore never occupied according to the principal of the relief.

s223ZA Taxation of Capital Gains Act 1992 provides for relief between the acquisition of the property and the beginning of residence on the site.   The conditions for this provision to be satisfied are:


·        The time at which the property became the individual’s only, or main residence was within the first 24 months of the individual’s period of ownership.

·        At no time during the period prior to taking occupation was the property another person’s residence.

·        That during the period of non-occupation a qualifying event occurred such as either:

there was a completion of construction, or renovation; or

there was a disposal of the property that immediately before its’ disposal was your only or main residence.

Therefore if you never moved in, it does not qualify as your main residence. There are no deemed occupation rules that apply as, in reality, you never lived in the property as your main residence.

HMRC have successfully taken individuals to tribunal over these kinds of cases, they can easily find out if you ever actually lived in the property using a paper trail of information. That information can be provided by evidence such as:

Electoral role

Council tax billing

Utility billing

Insurance on the property

And more.....

This list is not exhaustive. HMRC will even want to know where you spent your time, where your children lived, where you kept your clothes... and their questions may go on.

If you are in doubt about how your work or investment in property may be taxed then get in touch.

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