CGT or Income Tax

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    CGT or Income Tax

    Hi,
    I am purchasing a freehold house that has already been converted into 2 flats. I want to buy it, re-furb it and then re-mortgage each individual flat. Upon re-mortgage of each flat, i will make a profit.
    Does anyone know if i will be subject to CGT. Someone told me that it wouldn't be CGT, but it would be Income tax!!
    Can anyone shed any light on the difference circumstances when i would be subject to these two different taxes?
    Thanks very much
    T42

    #2
    you won't be liable for tax unless you sell either of the flats.

    Comment


      #3
      Originally posted by T42 View Post
      Hi,
      I am purchasing a freehold house that has already been converted into 2 flats. I want to buy it, re-furb it and then re-mortgage each individual flat. Upon re-mortgage of each flat, i will make a profit.
      Does anyone know if i will be subject to CGT. Someone told me that it wouldn't be CGT, but it would be Income tax!!
      Can anyone shed any light on the difference circumstances when i would be subject to these two different taxes?
      Thanks very much
      T42
      You have not said how you intend to use the flats.

      CGT only applies when you actually sell an asset, for example a property. Even if the values have gone up and you realise some of the increase in value by re-mortgaging, there is no CGT because the properties have not been sold.

      However, if someone is engaged in a business as a property developer, then he is taxed as if he is in business. Any profits of a business is taxed to income tax, the same as income from salary, wages or a grocery shop.

      In your case, the answer depends on whether you are deemed to be in business as a property developer. This in turn depends on your motives and intentions. If this is the start of a renovations business, then any profits is taxed to income tax. Any increase in value MAY be taxed to income tax as if you are selling to yourself at the market value after refurbishment.

      If on the other hand this is only an isolated transaction and you wish to occupy the flats for yourself or let to tenants, I do not consider any tax to apply.

      Ramnik
      Private advice is available for a fee by sending a private message.

      Comment


        #4
        Originally posted by Tax Accountant View Post

        In your case, the answer depends on whether you are deemed to be in business as a property developer. This in turn depends on your motives and intentions. If this is the start of a renovations business, then any profits is taxed to income tax. Any increase in value MAY be taxed to income tax as if you are selling to yourself at the market value after refurbishment.


        Ramnik
        Even if it is treated as a business, I would have thought, unless there is an incorporated "company" that owns the said property and asset re-valuation takes place for the balance sheet, no income has been generated. Merely raisng additional funds on the bases of increase market value does not constitue income. Remember, the borrowed money needs to be paid back and therefore is NOT income, hence there should be no income tax to pay here. The market value can go down as well - hence the profit has not been realised until the property gets actually sold - therefore no CGT either.

        No?

        regards
        Sober

        Comment


          #5
          Originally posted by sober View Post
          Even if it is treated as a business, I would have thought, unless there is an incorporated "company" that owns the said property and asset re-valuation takes place for the balance sheet, no income has been generated. Merely raisng additional funds on the bases of increase market value does not constitue income. Remember, the borrowed money needs to be paid back and therefore is NOT income, hence there should be no income tax to pay here. The market value can go down as well - hence the profit has not been realised until the property gets actually sold - therefore no CGT either.

          No?

          regards
          Sober

          Sober,

          (1) Are you sure that incorporated companies are treated differently than other property developers? Or are you simply guessing?

          (2) Are you sure that a person who is in business as a property developer does not have to pay any tax on a property, which he decides to keep for himself, unless he actually sells the property to a third party? Or are you simply guessing?

          Ramnik
          Private advice is available for a fee by sending a private message.

          Comment


            #6
            Of course I am not as well versed as yourself; however corporation tax laws are different to those applicable to us mortal souls.

            Asset revaluation is a common practice, in recent years in the corporate world. There is some guesswork in my opinion; but it is quite obvious, if a person owns the house already and then remortgages to raise money on the increased value - either with passage of time or as a result of renovation - that cannot be classed as "income" or "realised gain" hence neither the income tax nor the CGT should apply. loan is a loan and not income or gain. and gain is not a gain until realised by disposal of asset - or change of ownership at least.

            Just to gain a better understading, may I ask:
            How can a builder sell the property to himself if he owns it himself in the first place?

            Best regards
            Sober

            Comment


              #7
              To Sober and Wickerman,

              With each step, you have both digressed from how the original query was answered and the context in which it was answered.

              In this respect I refer you both to my original reply posted on 20 September 2006 as follows:

              (1)I said that:
              CGT only applies when you actually sell an asset, for example a property. Even if the values have gone up and you realise some of the increase in value by re-mortgaging, there is no CGT because the properties have not been sold.

              So who said that simple re-mortgaging incurs CGT liability?

              (2) I then went on to say:
              However, if someone is engaged in a business as a property developer, then he is taxed as if he is in business. Any profits of a business is taxed to income tax, the same as income from salary, wages or a grocery shop.

              In your case, the answer depends on whether you are deemed to be in business as a property developer. This in turn depends on your motives and intentions. If this is the start of a renovations business, then any profits is taxed to income tax. Any increase in value MAY (you will notice that I have used the word MAY because the answer will depend on the exact circumstances of the individual concerned) be taxed to income tax as if you are selling to yourself at the market value after refurbishment.

              In response to this, Sober asks: How can a builder sell the property to himself if he owns it himself in the first place?

              This is best answered by an example. If a shop-keeper takes any goods from his own shop for himself or his family, he has to buy them for tax purposes at the same price at which he sells to his customers. It is his own goods but he still has to pay the full selling price into his till. This means that he is paying £12 for the same goods which cost him say £10 and is charged tax on the £2 supposed profit that he would have made had he sold the same goods to a customer.

              In the same way, if a builder builds or renovates a property in his normal line of business and decides to keep one for himself, he has to pay tax on any profit which he would have made had he sold it to someone else.


              (3) I then went on to conclude:
              If on the other hand this is only an isolated transaction and you wish to occupy the flats for yourself or let to tenants, I do not consider any tax to apply.

              Property renovations can be for personal use or in the course of a trade as a builder. It is difficult to say when the line is crossed from one to the other and quite often it happens unintentionally without even realising that the line has been crossed. The whole subject is fraught with difficulties and is not easy to grasp in the course of a free forum such as this.

              Quite often, people have a tendency to read a reply for not what it states but for what they want to read into it.

              I hope these comments are helpful.

              Ramnik
              Private advice is available for a fee by sending a private message.

              Comment


                #8
                Hi Ramnik

                Thorough as ever. Thanks for the explaination; certainly clears my understanding. My intention was not to challange your reply, just to seek clearification for myself. The question from T42 as I understood was whether merely raising money by way of remortgaging gives rise to tax of some kind. Your answer quite clearly stated that it wasn't. But the confusion does arise when you likend it to profits as income etc - which indeed is valuable informatiion, but may have caused confusion for anyone, such as myself, looking for a simple remortgage.

                Thanks and best regards
                Sober

                Comment


                  #9
                  Originally posted by sober View Post
                  Hi Ramnik

                  Thorough as ever. Thanks for the explaination; certainly clears my understanding. My intention was not to challange your reply, just to seek clearification for myself. The question from T42 as I understood was whether merely raising money by way of remortgaging gives rise to tax of some kind. Your answer quite clearly stated that it wasn't. But the confusion does arise when you likend it to profits as income etc - which indeed is valuable informatiion, but may have caused confusion for anyone, such as myself, looking for a simple remortgage.

                  Thanks and best regards
                  Sober
                  Hi Sober,

                  No offence taken.

                  I quote below the original query by T42

                  ''I am purchasing a freehold house that has already been converted into 2 flats. I want to buy it, re-furb it and then re-mortgage each individual flat. Upon re-mortgage of each flat, i will make a profit. Does anyone know if i will be subject to CGT. Someone told me that it wouldn't be CGT, but it would be Income tax!!

                  Can anyone shed any light on the difference circumstances when i would be subject to these two different taxes?''


                  You will note from the highlighted comments above that the query was more than a simple re-mortgage question as you believed. The querist actually requested to know how and why he could possibly be taxed to income tax on increase in value due to re-furbing.

                  But as I said before, quite often people read only certain bits in a reply and take it out of context, as has happened here.

                  Ramnik
                  Private advice is available for a fee by sending a private message.

                  Comment

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