An investment or a trade. When is a gain a capital one & not an income ?

[Pobinr]

How long must one keep a property for any gain to be regarded by HMRC as a capital gain rather than a business profit ?
In other words if you buy a flat & refurb it & sell it for a good profit after owning it for say only 6 months, can you claim that as a capital gain rather than a trading income which might attract income tax at a higher rate ?
Clearly the former would be best as 18% CGT flat rate is better than up to 40% income tax if treated as profit on income as a builder developer.
Any informed opinions/knowledge appreciated.

[TaxationPete]

As this sounds as though it was your intention to to refurb and sell then this and the facts,not rented, not lived in etc. will be deemed by HMRC as "an adventure in the nature of trade" and Income tax, class 4 NI contibution and the requirement to be registered as self employed will apply. If you accounts and receipts are well kept then every expense and even interest and costs of loans/mortgage will be deductible which is not the case if this was a CG issue. Regards Peter

[Grange]

It's not length of time that makes the only difference. If you spend 5 years refurbing a large mansion then it probably is still trading; whereas if you buy a flat, spend two months doing it up and then let it for six months... and then sell it to pay for your daughter's wedding (say) then it would still be capital.

I suggest a read of HMRC's guidance on the "badges of trade".

[Pobinr]

As this sounds as though it was your intention to to refurb and sell then this and the facts,not rented, not lived in etc. will be deemed by HMRC as "an adventure in the nature of trade" and Income tax, class 4 NI contibution and the requirement to be registered as self employed will apply. If you accounts and receipts are well kept then every expense and even interest and costs of loans/mortgage will be deductible which is not the case if this was a CG issue. Regards Peter

Badges of trade seems to be a good clue to investigate. Thanks. One point is that regardless of what type of trade it is perceived to be by HMCR, one can always claim interest as an expense. I know from experience with a flat I took 18 months to refurb & never let out. Then sold & paid CGT on. I claimed the mortgage interest as an expense & HMCR didn't object.

[TaxationPete]

If I look at your history you appear to have some BTL properties so you have a rental business. This is perhaps how you got away with the 18 month refurb but don't push your luck If you own a second home purely for your and your families use then this interest is not deductible as there is no rental income to deduct it from. Regards Peter

[Pobinr]

If I decide to give up my day job & do one refurb a year as my main source of income then it looks like I'm better off claiming as a trade anyway. That way I get my tax allowances & the 10% & 20% bands. Might work out as less than the 18% flat rate on CGT. For sure it's unfair that the cap gains on properties I've owned for 10 or more years will now be taxed at 18% as from Apr 08 when I come to sell them. Previously with taper relief only taxed as 60% of 20% for the most part if not in employment. That is equal to just 12%.
One thing I'd like to know about the new 18% flat rate CGT. Is what about personal allowances ?
If one is not employed & therefore not using one's tax allowances then can they be used to CGT offset tax. Or under Darling's new regime from Apr 08 is the 18% rate going to be payable on the 1st £5,225 personal allowance. With the current regime CGT was regarded as lumped in with one's income so was 10% then 20% for the most part, until one exceeded the 35k 20% band at which point CGT was charged at 40%, less any taper relief of course.

[Grange]

As you have a rental business it is perfectly acceptable to have made a bad investment that you then have to sell without ever having rented it out.

18 months is a long time; you may have bought your flat in an area where there is subsequently no rental demand - at which point perhaps you advertised it for a couple of months for rent to no avail and then sell it.

It all goes back to motive. Did you fund it with a BTL mortgage, or a developer's mortgage? What advice did you get when you bought the flat with regard to possible rental values when you had done it up? What marketing advice did you get when it came to advertising it for rent?

In the current dropping (?) market you might wish to put a couple of your rental properties up for sale. That would help to suggest that you consider it a good time to (partially) liquidate your rental portfolio. That one of the properties has never been rented out... well that's life.

Work out your intention and get the paperwork (from letting agents, banks etc.) to back it up; you can then argue your position strongly if HMRC come to challenge it.

[Grange]

If I decide to give up my day job & do one refurb a year as my main source of income then it looks like I'm better off claiming as a trade anyway.

Quite possibly. But this may change the nature of the previous disposal you mention above.

What about buying and doing up one property a year - and then selling a property you bought ten years ago. That's not trading; that's reviewing your investment portfolio and disposing of the least-well performing asset annually.

What I've seen suggests that the 18% is a flat rate on everything - save for your annual CGT exemption.

[Pobinr]

As you have a rental business it is perfectly acceptable to have made a bad investment that you then have to sell without ever having rented it out.

18 months is a long time; you may have bought your flat in an area where there is subsequently no rental demand - at which point perhaps you advertised it for a couple of months for rent to no avail and then sell it.

It all goes back to motive. Did you fund it with a BTL mortgage, or a developer's mortgage? What advice did you get when you bought the flat with regard to possible rental values when you had done it up? What marketing advice did you get when it came to advertising it for rent?

In the current dropping (?) market you might wish to put a couple of your rental properties up for sale. That would help to suggest that you consider it a good time to (partially) liquidate your rental portfolio. That one of the properties has never been rented out... well that's life.

Work out your intention and get the paperwork (from letting agents, banks etc.) to back it up; you can then argue your position strongly if HMRC come to challenge it.

I bought it with a BTL mort with the intention of not letting it out but instead to refurb it to sell at a profit. I had no idea that this in theory should not count as a Capital gain. Anyway it did in the end. Either way the tax man got his cut.