Property - Investment or Trade

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groundy
groundy Registered Posts: 495 Dedicated contributor 🦉
I have a client that has a number of properties that are rented out and I am fine with the dealings of these. However, they have started to acquire the odd property with the intention of improving prior to selling on.

I have advised that this is a trade, however if it had been rented before selling it may be possible to argue as an investment property and therefore subject to CGT not Income Tax. This is were I have come unstuck as I can not find guindance on how long a property must be rented to be classed as an investment rather than a trade.

To further complicate matters this client has been advised by HMRC at a seminar that after selling a property if they invest in another property they can claim Rollover Relief. I am certain that Rollover Relief is not available on Investment properties and absolutely certain that it is not available where the property is a bought and sold as a property development trade.

I would appreciate anyone's thoughts or comments, Cheers.

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  • Newbie
    Newbie Registered Posts: 229 Dedicated contributor 🦉
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    cant vouch for this link but might be useful
    http://www.markmclaughlin.co.uk/index.php/archives/797
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    groundy wrote: »
    I have advised that this is a trade, however if it had been rented before selling it may be possible to argue as an investment property and therefore subject to CGT not Income Tax.

    Whats their reason for renting? If they have bought the property to rent out and profit from rental income then maybe not a trade. But if they're renting because market conditions have changed, it'll be much harder to argue the case.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    I don't think it's to do with length of time - it's to do with intent.
  • groundy
    groundy Registered Posts: 495 Dedicated contributor 🦉
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    Cheers Monsoon that was my thought. What was the intent when property purchased!

    Cheers Newbie, interesting read.
  • T.C.
    T.C. Registered, Tutor Posts: 1,448 Beyond epic contributor 🧙‍♂️
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    If a property developer buys and rents out a property then this is classed an an investment property. When he sells this is subject to CGT. If he buys and sells on a regular basis then this is classed as a trade. Yes it is down to intent at the purchase time, but the situation can change if the property does not sell as planned and it is let out instead.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    T.C. wrote: »
    Yes it is down to intent at the purchase time, but the situation can change if the property does not sell as planned and it is let out instead.

    The situation can change but the tax treatment does not (necessarily).

    E.g. property developer buys with intention to renovate and sell but cannot fetch price wanted on the market so temporarily rents out to see if market conditions improve. That rental income is still trading income because it was the intention for it to be sold.

    It only becomes investment income if you are moving the property out of trading 'stock' and onto the balance sheet, which itself has tax implications.

    Lots of options and choices in this scenario as to how you want to play it.
  • T.C.
    T.C. Registered, Tutor Posts: 1,448 Beyond epic contributor 🧙‍♂️
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    Totally agree with that explanation. When I have moved a property to the Balance Sheet then it usually becomes an investment property and then liable to CGT when sold. Properties bought and sold as part of a property developer's trade are subject to income tax. You need to check the timescale involved with this particular case and whether the property was a work-in-progress figure or capitalised on the Balance Sheet.
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