Posted by Simon Misiewicz on 19th August 2013
The 5 keys to Asset planning
- Selling properties as a one off & Capital Gains Tax
- Selling properties as a trade (Income tax v Corporation tax)
- Using trusts and inheritance tax planning
- Transferring assets between spouses
- Residency / Domicile – UK & international tax
So without delay let us get into Part 2: Selling properties as a trade (Income tax V Corporation tax)
If you are buying and selling properties as an individual, you would be charged Capital Gains Tax (CGT) if it is a property that you have rented out before, or your very own property.
If you buy and sell properties as a trade, then you are liable to Income Tax rather than CGT. This means that you can pay up to 50% tax rather than 28%.Here is a question for you. What would you rather pay in tax a) 50% or b) 20%?
Buying and selling properties through a limited company you will be charged corporate tax on the profit as though it is an income (4).
Sarah buys and sells properties on a regular basis. She buys one property for £100,000 and incurs £500 legal fees and other associated finance arrangement fees of £2,500. She then spends £5,000 on improvement costs. If she worked with me I would have reduced her income tax through capital allowances but never mind!!
Later, in the same year, she sells the property for £120,000 and pays the estate agent £1,500 and her solicitors £500. The profit is shown below:
£120,000 sales proceeds
£100,000 less purchase price of the property
£5,000 Less Property improvement costs
£1,000 Less legal / solicitors fees £500 X 2
£1,500 Less estate agent fees
£2,500 Less arrangement fees
£10,000 taxable profit
Sarah would pay the following amount of tax (6):
- £2,000 Sole trader 20% tax (earnings less than £32K + £8K personal allowance)
- £4,000 sole trader 40% tax (earnings between £32K – £150K + £8K personal allowance)
- £5,000 sole trader 50% tax (earnings over £150K + £8K personal allowance)
- £2,000 Corporation tax 20% (regardless of earnings)
Some of the downsides for using a limited company to trade property are:
- Do not get the CGT allowances that individuals do
- The additional administrative / accountancy fees to set up and run a limited company
The income you are allowed before you start paying high amounts of tax is circa £51K (circa £8K personal allowance + circa £32K + circa £11K CGT allowance).
If you are able to keep your total incomes (earnings and profit) below circa £51K then you would be more tax efficient to trade through a sole trader set up than a limited company. Once your trading profits exceed circa £51K then it may be advisable to start looking at a limited company.
Roll over allowance to reduce CGT on business assets
Roll over relief for property used in trade. If you have a property that is used for trade, such as hotels, serviced apartments etc you are allowed to use roll over relief. That is any profits that are made, may be relieved against future purchases. So that you defer the tax you pay (5). Let us clear this up with an example.
Example 2 – Roll over relief for properties used on trades.
Thomas buys a bed and breakfast for £150,000 including all acquisition costs. He later sells the same asset for £200,000. This would mean that the profit made would be £50,000 and would normally be charged corporate tax on this amount. However, he chooses to buy a new bed and breakfast for £250,000 and as a result he rolls over the profit made in the first sale of £50,000. He then sells the second bed and breakfast for £300,000. He stops there.
£300,000 sales proceeds
£250,000 less purchase costs
£50,000 add back, roll over relief
£100,000 Taxable profit
You will notice that residential properties, where a trade does not take place, is not used as business trade and roll over relief is not available. A trade is defined whereby products / services are provided to the tenants such as bed and breakfast, cleaning services etc.
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(1)CG10241 – Capital Gains Tax: Computation
(2)Capital Gains Tax Rates and Annual Tax Free Allowances
(3)CG10247 – Capital Gains Tax: Companies
(4)CG10301 – Capital Gains Tax and Self Assessment: commencement of self assessment
(5)CG60280 – Roll-over relief: conditions
(6)Income Tax rates and Allowances