Flipping a property

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    Flipping a property

    My son and I are thinking of buying a property together and renovating it. We were intending to rent it out but now are thinking about just selling it again once work is finished. If we purchase property in three names (our’s and his partner’s), we would get three capital gains allowances is that correct? Or are there different rules if you are flipping a property and not renting it out first. I read an article that discussed being considered trade and therefore not eligible for capital gains exemption but that tax would be calculated differently The term that come to mind is active income. Anyone here have any advice, knowledge of this? Thanks.

    #2
    If the asset is held for less than 12 months, the profit is added to your job income and charged under income tax. at 20% or 40%

    If the asset is held for more than 12 months, the profit minus capital gains allowance is charged under capital gain tax at 18% or 28%.

    Comment


      #3
      Is the 12 month restriction a rule or a rule of thumb?
      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

      Comment


        #4
        Actually I cannot find any definition of minimum holding period of 12 months for capital gain tax on hmrc website..

        There is a liability to capital gains tax after sale of an asset if the gain is greater than the annual free allowance of £12,500.

        If the gain is achieved within 12 months, the taxable capital gain is charged at income tax rate ( 20% and 40%) .

        If the gain is achieved after holding more than 12 months , the taxable capital gain is charged at cgt rate ( 18% and 28% ) for property and (10% and 20%) for other types of assets ( Shares) and business assets ( 10% for entrepreneurs retirement after 3 years or longer ? ) .

        Comment


          #5
          Property investment and property development are two distinct businesses.

          Many developers use company structures to be more tax efficient and it's worth a good discussion with an accountant.
          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

          Comment


            #6
            Where you purchased a property with an intention to refurb and then let it, then capital gains tax should apply to a disposal of the property, even if you never actually let it. Given the current pandemic, it is wholly acceptable that you may have had a change of heart. From the point that the intention changed, then arguably income tax applies to a trading activity although I doubt HMRC would press the point unless a lot of tax was at stake; it's 18/28% versus 20/40/45%.

            If you purchase with an intention to flip or change intention and decide to flip before date of purchase, then it is a trading activity subject to income tax.

            There are no mimium holding periods which afford a CGT treatment; the badges of trade are considered to establish whether an activity is a trade or investment; see https://www.gov.uk/hmrc-internal-man...anual/bim20205.

            Where there are three purchasers, you should benefit from 3 CGT annual exemptions where CGT applies.

            Where income tax applies, a limited company may be worth considering depending on the expected returns, the investors circumstances and the long term intentions with regard to profits.

            Comment


              #7
              A question if I may (not that I am disposing or buying but just sparked a question),,, is it enough to purchase the property in three names or do three names actually have to put funds into it at the point of purchase?

              If a property were bought by ten members of a family and all on the land reg deed but none of them contributed to the actual cost of the house in fair proportion can than capital gains exemption be used, the same question regarding the sale,,, do the funds need to be passed back to the members that purchased it.

              Equally could one provide all the funds but the other two be doing the labour work for an equal share of the profit?

              All the best

              Comment


                #8
                A good question! I read the post as being a purchase between a father, son and their partner and so assumed they'd all have an equitable interest. A partnership arrangement could easily have a variable profit sharing ratio that wouldn't necessarily follow equitable interests with partners’ capital contribution being know how and skill. There would still be an issue around whether this would achieve capital treatment and if there was always a profit seeking motive rather than an investment partnership in existence, income tax would most likely apply.

                I suppose that if the "money-man" gifted cash to family members so they'd have a vested interest, then they could easily be entitled to a share of the gain equal to their CGT annual exemption. If it's all done as a sham with all the profit returning to the money man, then HMRC are more than likely to challenge such arrangements under wide reaching anti avoidance provisions.

                HMRC's own internal guidance warns against challenging partnership arrangements where family members appear to have profit sharing ratio's that take advantage of rate bands and allowances. However, I wouldn't advocate using contrived steps to maximise CGT annual exemptions. HMRC only seem to readily accept such gifts between husband and wife or civil partners. If arrangements were commercially justifiable, I would probably not be so cautious.

                Comment


                  #9
                  thanks - interesting reading

                  Comment


                    #10
                    If the property title was a joint tenancy, anyone not contributing to the purchase would have received the ownership as a gift and would be an owner as a matter of fact.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Stew,

                      Land Registry only allows 4 names maximum on the property title.

                      If more than 4 names , you would need to register under company name and the members in the group become shareholders.

                      The members can be shareholders with one £1 share each and the company borrows the funds from one member and pays annual interest on the loan.

                      Comment


                        #12
                        Gordon999,

                        It's not strictly true that a company must be used where there are more than four owners. Where there are more than four parties with an interest in a property, the first named four are treated as holding the land on Trust for the remaining beneficial owners; good documentation is essential to avoid issues further down the line.

                        Comment


                          #13
                          Its safer to buy property and register under your own name. When the property is registered under another person's name, you have lost control of your money.

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