When a buy-to-let property is sold it would normally attract capital gains tax at 28% (and sometimes a lot less if the property has been the sellers main residence at some point in time). But what would the position be if it was treated by HM Revenue and Customs as a trade rather than an investment activity? A property developer is taxed very differently from an investor. The profit on sale would be taxed as an income profit at income tax rates of up to 50%. In addition, the computation of a capital gain is different from the computation of an income profit and in some instances the income route may actually be beneficial if borrowing costs are very high as interest charges may be offset against trading income but not against the capital gains of the investor.
Whether a business is a trade or investment business will be a matter of fact and can be heavily influenced by the intention of the trader. If a person purchases a property with the intention of quickly doing up the property in order to sell on at a profit then the facts strongly point towards trading activity. On the other hand if the property is purchased with the intention of letting on a long term basis then this strongly points towards investment. Not all situations are clear cut and intentions can change. A property bought for long term letting could turn into a trading project if say it was decided that current market circumstances favoured a quick sale. Alternatively a property acquired as a development project may turn into an investment if once development has finished it is decided to retain the property for long term letting.
A switch from trade to investment or vice versa can cause problems as the movement to or from stock causes a tax point to arise based on market value at the point of sale. This means that tax will become payable at the point of change rather than on sale and at that point there will be no cash proceeds to fund the tax cost.
If you currently have a property which you are letting or developing and would like to talk to us about its trading or investment status or any other tax or accounting issue related to the property then please contact a member of our property team.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.
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