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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am looking to buy a property to renovate and sell

Resolved Question:

Hi
I am looking to buy a property to renovate and sell in the UK - this may be the first of many and I want to understand the tax implications and ways to minimise the amount of tax I pay.
I do not currently own my own home, pay higher rate income tax and am employed.
What tax would I be liable for (income or CGT), at what level and what costs am I able to deduct? (eg would I be able to deduct costs of equipment on the first renovation, for example)
Finally, would I be any better off tax wise setting up as a company (if so what type?) to buy and sell through?
Thanks.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Leave this with me while I draft my answer. It will take a while so please bear with me.
Expert:  TonyTax replied 2 years ago.
Hi again.

SOLE TRADER OR PARTNERSHIP

If you buy and renovate property with a view to a quick sale and profit, then you will be treated as trading by HMRC. If you trade on a self-employed basis, you will pay Income Tax and Class 4 National Insurance Contributions on your profits. There is also a flat rate Class 2 National Insurance Contribution of £2.80 per week. So, the amount of tax and NIC you will pay will be dependent on whether you continue with your job or not. Take a look here for the current tax rates and allowances.

You could reduce your tax exposure by paying pension contributions out of your profits.

CAPITAL GAINS TAX

If you didn't sell the properties immediately but let them for a year or two, you could then sell and pay Capital Gains Tax instead of Income Tax and NICs. A pure property developer looks for a quick profit and to use that profit to move onto the next development or renovation. A property investor tends to hold onto property for a longer period but you can be both property developer and investor at the same time. I've had several clients in that situation. Take a look here for information on Capital Gains Tax which is charged at 18% and 28% or a combination of the two rates and how it interacts with Income Tax.

LIMITED COMPANY


Take a look here for some information on running a limited company. A limited company pays Corporation Tax at 20% on its trading profits and capital gains. It can also claim indexation allowance, a type of inflation allowance, against its gains which individuals cannot.

A director or shareholder only pays tax on what they draw from the company in terms of salary and/or dividends whereas a self-employed individual pays tax and NIC on whatever their profit is for the tax year. Paying salaries can be expensive what with employee and employer National Insurance Contribution rates which you can see here. The sum of salaries and employer NIC are deductible expenses so will save the company 20% in corporation tax but the director may pay a higher rate of tax personally.

Whilst dividends are not a deductible expense and can only be paid from profits to shareholders, they are not subject to NIC and are treated as basic rate tax paid. There will only be further tax to pay if the shareholder is a high rate taxpayer. Take a look here and here for information on tax and dividends.

Use the calculators here and here to experiment with different profit figures and to compare the different tax and NIC liabilities which arise for self-employed profits and limited company profits/director/shareholder income. The notes here are also informative.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Hi

Thanks for the reply - am still a bit confused.

As I am employed, and will continue to be while doing renovations, when you mention "if you trade on a self employed basis" under sole trader - does this mean that I will complete a tax return for the property gains and, as a higher rate tax payer, will pay 40% on any profit? What about NIC in this situation?

Are there any other hidden costs relating to a ltd company in terms of filing accounts annually etc? This sounds like a better option in my situation for minimising tax liability?

In terms of deductible costs, what am I able to claim for in all situations (sole trader / ltd company)? Do I just need to keep all receipts to prove costs?

Thanks

Expert:  TonyTax replied 2 years ago.

You can be employed and self-employed at the same time.

If you are already a 40% taxpayer, you will pay 40% tax on profits from self-employment and Class 4 and 2 NIC, 45% tax if your total income exceeds £150,000. You may be able to claim a refund of some Class 4 NIC after the end of the tax year for which you pay Class 4 NIC if the sum of your Class 1 (employee) NIC, the Class 2 NIC and the Class 4 NIC exceed a certain level. It is possible to defer Class 4 NIC in certain circumstances as you can read here but its not as straightforward as it used to be when there were upper limits for NIC.

You can claim capital allowances on tools and equipment you use in a business whether you run it as a sole trader or through a limited company.

With a limited company, you have to have deal with more onerous compliance duties such as submitting an annual return to Companies House alongside abbreviated accounts. You also have to submit accounts and corporation tax returns to HMRC annually. Professional fees will be higher than for a self-employed individual.

If you are self-employed, you simply prepare a set of accounts and post those figures in your self-assessment tax return as well as income form other sources. Take a look here and here for information on the types of expenses you can claim against bsuiness income.

You should retain receipts and invoices for any business as HMRC may ask to see these.

Customer: replied 2 years ago.

Hi

Thanks for the reply. I am still not clear in terms of the costs that I could deduct - would I be able to deduct any renovations costs as well as any tools purchased? This would ensure a minimum profit for tax purposes?

As a limited company, paying 20% tax sounds preferable to 40% plus NIC if sole trader. How much tax would I pay on salary or dividends? And would I have to purchase the property in the name of the company in the first instance?

If I lived made the property my residence, even if I rented another place, how long would I have to live there to claim it as a CGT bill (presumably 28%), rather than pay it as income tax?

Thanks

Expert:  TonyTax replied 2 years ago.
Clearly, renovation costs (labour, materials etc) would be deductible. Many such projects would be non-viable otherwise.

This is the problem with a limited company. How do you get the money out. A 40% taxpayer would pay 25% of a cash dividend in tax. A 45% taxpayer would pay 27.5% of a cash dividend in tax.

It would probably be preferable to buy the property through the company from the start. A transfer into a company later could give rise to a CGT liability. In addition, lenders may change loan terms if the ownership changes from an individual to a company.

If you live in a property while renovating it you sell risk the income tax route, especially if you sell it quickly. If you live in the renovated property for a year or so after the work is completed, you may be in the clear. There are no set periods but a few months is risky.
TonyTax and other Tax Specialists are ready to help you
Expert:  TonyTax replied 2 years ago.
Hi again.

It's been a few days since I answered your question. Is there anything you need further clarification on?

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