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bigduckontax, Accountant
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Hi. In June 2013 I purchased a habitable bungalow for £115k

Customer Question

Hi.
In June 2013 I purchased a habitable bungalow for £115k to knock down and redevelop. It was not my principle residence.
In July 2013 I set up a property development (my wife and are directors and shareholders) company to encapsulate this and future projects as a long-term business. I transferred the bungalow to the company for £115k.
I then spent a year partially demolishing the bungalow and drawing up plans.
In August 2014 we decided (genuinely) we would like to live in it. We transferred it to ourselves a joint owners for £100k as the bungalow was now derelict. We then submitted a planning application which is still in the system.
We transferred it out of the company so that we could avoid a large tax bill on the estimated future profit of £150k as it will be our principal residence. We are aware that we are now self builders as far as the tax system is concerned, and will need to claim VAT back at the end.
The company has made a loss of £15k on this project, plus has a year of expenses relating to the now 'abandoned' project. We still want to keep the company for future work, and expect the company to make up for the losses in the future.
The big question: Is HMRC likely to have a fit, or have we done the right thing?
The even bigger question: If we decide not to move in once we have planning approval, can we transfer it back to the company for say £122k, claim (joint) CGT relief, and let the company carry on with the project. Of course the company would make £22k less profit. Is HMRC likely to have an even bigger fit?
Any advice would be very gratefully received. Thank you in anticipation.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
1. Transfer of house to company; probably no problem providing that the disposal price was accurate. They are, I agree, in time terms pretty close together, but in some parts of the country prices are rising very fast indeed. If there is a gain there then this can be assessed as a capital gain under the Capital Gains Tax (CGT) regime.
2. August 2014 transfer must be at the market price for such a house in its condition at the point of transfer. The company now has a capital loss which can be set against profits for Corporation Tax (CT). Companies are not subject to CT; any gain is rolled into the Profit and Loss Account and aggregated for CT.
3. If you transfer back to the company should you decide not to move in providing this transfer is done at current market value with planning permission you should be in the clear.
If you follow this simple guidance HMRC may not like it, but there is not much they can do about it. After all circumstances and people change their minds. There remains one danger, that HMRC regard your activities (not the company's) as trading in land and impose Income Tax as opposed to CGT. This can happen, be warned; they have been known to apply it to a single property.
You should ensure that all these transactions are minutely documented to cover yourself and the company if they aver scrutinised by HMRC. I would be inclined to engage a trusted, local professional to guide you through this maze.
I do hope I have shed some light on your query.
Customer: replied 2 years ago.

Hi Keith,

Thank you for your quick reply.

I understand that there are therefore two issues:

1. Ensuring that transfers are correctly valued, and that this is documented. Is it reasonable to collect evidence of similar properties and make reasonable adjustments for condition (i.e. live-in-able or derelict), or would I always need a formal surveyor's valuation? Would you recommend an HMRC Post Transaction Valuation Check, or is it better to keep my head down?

2. Avoiding being treated as a property trader. I hadn't considered this. My wife would pay 40%, so we'd be worse off compared with the company paying CT. I'd need to complete the CGT Summary on my SA, but my wife doesn't do SA. Would she need to inform HMRC if she made a gain under the allowance?

I'll try not to bother you with any more questions!

Andy

Expert:  bigduckontax replied 2 years ago.
Andy
You could go to the extent of having formal valuations made and that would strengthen your case in the event of an hostile inquiry from HMRC. However, they wouldn't come cheap so I suggest that evidence of similar properties and conditions is so readily available these days that should suffice. You could go down the Valuation Check road, this uses District Valuer's collected data, but I would be inclined to emulate Brer Fox, 'For he lay low and say nuffin!'
Property trading is merely a possibility; I put the caveat in to warn you of such capers.
Please be so kind as to rate me before you leave the Just Answer site.
Regards
Keith
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3101
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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