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TonyTax
TonyTax, Tax Consultant
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I have just inherited £100000 and as I have only a state pension

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I have just inherited £100000 and as I have only a state pension I wanted to sell my home and buy two properties with the capital released and the inheritance to renovate. \i would move into one of them, do it up and sell it and then move into the second one and do the same or let it out in the period.
I know i wouldn't have to pay capital gains tax on the first property as it would be my main residence. What are the capital gains tax implications for the second one?
Many thanks indeed
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

I'm afraid that this isn't straighforward.

If you move into a property with a view to "doing it up" and then selling it, HMRC may seek to tax you as a property developer if you sell it very soon after finishing the job so that you would pay income tax on the profit as opposed to capital gains tax or no tax at all if your claim for main residence relief was succcessful, notwithstanding the fact that you are living in the property when the work is going on. If it is not your intention to make a property your home when you move into it and the motive is profit, then HMRC will try to deny you main residence relief.

If you do another refurbishment shortly after the first or at the same time, that will give HMRC even more evidence that you are trading as a property developer.

If you could let the first one out for a year or so after the refurbishment, you may get away with paying CGT as opposed to income tax at worst or none at all at best if you claimed main residence relief successfully for the period you lived in the property and a maximum of the last 18 months of ownership, excluding overlaps.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Hi

Please could you clarify the last paragraph. I am looking for the best plan tax wise if you can help with this. It may be to just buy one property at a time, live in it and not buy two.

I haven't understood the past paragraph as to the implications if I had bought two properties. I am taking it that if I refurbished the first and let it out and sold within 18 months that might be deemed appropriate for CGT, what would be the implications and best plan for the second property?

thanks

Expert:  TonyTax replied 2 years ago.
If you buy one property, do it up and sell it quickly, HMRC may still tax you as a property developer even if you are living in the property. Doing up a second at the same time will add fuel to the fire.

If you buy one at a time, you may get away with a main residence relief claim initially but as you do more refurbishments, HMRC may revisit all the transactions with a view to taxing you as a property developer.

If you bought one, moved in, did it up and continued to live there for a year or so after completing the refurbishments, you may get away with paying no tax due to the main residence exemption as you will have effectively made the property your home. If, instead, you bought another one to move into and do up, let the first and sold it within 18 months of moving out, you may also escape tax.

Nothing is guaranteed. It may be that HMRC never question the transactions but they do look at property transactions closer these days.
Customer: replied 2 years ago.

'If, instead, you bought another one to move into and do up, let the first and sold it within 18 months of moving out, you may also escape tax.'

How would this work, could you explain it further, how and under what terms you might escape tax? (Please be very explicit and put in simple language if possible.)

Might it just be easier to stay living in my current home and buy one property to do up and sell and then I would pay capital gains tax over £11000 of profit made?

Thanks

Expert:  TonyTax replied 2 years ago.
If you stayed in your current home and bought another property which you refurbished and then sold, you might declare the profit as a capital gain in your tax return. However, HMRC may charge the profit to income tax on the basis that you had engaged in "a venture with a view to making a profit", the very definition of trading.

If you let the refurbished property for a year or so after the refurbishment before selling it, you would probably get away with paying CGT instead as you will be seen as a property investor (CGT) as opposed to a property developer (Income Tax or Corporation Tax if done through a limited company).

I hope this clarifies your situation but keep asking questions if there is anything you are unsure of.
Customer: replied 2 years ago.

Hi

In the first scenario in the last reply where you say HMRC might charge the profit to income tax and I had been living on inheritance with no income would mean the first £11000 or so would be tax free under personal allowances.

In the last paragraph in the last reply I am getting a bit confused now as to whether we are talking about a scenario where you had one property or two. I think you are linking it to the previous paragraph.

Do you have a sense of what is the best course of action you would advise as a personal advisor to stay in my home and have one extra property on the go for doing up or lepton out

or selling my home to have two properties to do up and sell or let? What would you do? obviously I know that I have to make my own mind up but I would appreciate a view.

Manythanks

Expert:  TonyTax replied 2 years ago.

You are entitled to a personal allowance of at least £10,000 to use against your income, whether it is pensions and/or self-employed profit. The CGT allowance of £11,000 is only available to use against capital gains.

If you have two property refurbishments running alongside one another, you are more likely to be seen to be trading if you sell them quickly after the work is done. Staying in your existing home and doing one refurbishment is less risky, particularly if you let it for a year or so before you sell it. If you keep doing it, however, HMRC will notice and you'll be taxed as a trader.

If it were me, I'd stay in my home, buy a property, do it up and let it for at least a year before selling it. I'd then do the same again.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15883
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Hi

thanks for that. Nearly there I think

'If it were me, I'd stay in my home, buy a property, do it up and let it for at least a year before selling it. I'd then do the same again.'

In this scenario what tax would you pay on each property you do up.let and sell, capital gains tax?

Expert:  TonyTax replied 2 years ago.
I'd declare the profit each time as a capital gain and pay CGT.

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