When is refurbishment not development but investment?

[Pobinr]

I have a portfolio of BTL's so am regarded by HMRC as an investor.
However a year ago I bought a large tatty house divided as two flats in a prime area for £250k.
I have done a total upmarket refurb & added considerably to the value of the two flats. The 1st one we've done is now valued at £220k !
If I sold that would the tax man see that as a gain due to development rather than investment ?
If so would I then be liable to pay income tax instead of CGT if he saw it as a trade meaning I'd be in 40% income tax territory so wouldn't be worth selling.
How long would I have to keep the flats to make them seen by HMCR as an investment & thus only liable for the lower rate of 18% CGT & also benefit from the tax free allowance of £10,100 ?
Advice appreciated.

[TaxationPete]

Sounds like a busines in a nature of trade. You should be registered as self employed and IT will apply on disposal. However this means that 'ALL' the costs of the refurb, finance, loans, rates, trvel etc. etc. etc. are deductible. You may find that this is in your favour. Regards Peter

[Pobinr]

Sounds like a busines in a nature of trade. You should be registered as self employed and IT will apply on disposal. However this means that 'ALL' the costs of the refurb, finance, loans, rates, trvel etc. etc. etc. are deductible. You may find that this is in your favour. Regards PeterAll those costs are claimable against CGT tax. Costs are costs. They are not exclusively claimable against IT.

How long would I have to keep the flats to make them seen by HMCR as an investment & thus only liable for the lower rate of 18% CGT & also benefit from the tax free allowance of £10,100 ?

[TaxationPete]

Deductible items in your scenario against CG and IT are not the same particularly is loans/mortgages are involved. On the face of it this is an activity in the nature of trade and HMRC may well pick up on this and IT will apply, as I said before there may be advantages in this but you need an in depth look at your costs and finance. To secure a CG situation you would have to rent the properties out for at least 6 months although a year is more secure. Should add that as you have a BLT portfolio it may not get picked up as your busines is treated as a whole although it was your intent to develop the property for gain. If this was intent you should have registered as self employed within 90 days of commencement. Start here and read on :
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20210.htm
Regards Peter

[Pobinr]

Thanks that's helpful. As regards mortages... as far as I'm aware the interest is claimable whether CGT or IT it makes no difference.

[TaxationPete]

Mortgage interest is a 'revenue' item as you are aware from your B2L income, it is not a capital item. However under IT all the costs of the laon and the iterest is deductible as are rates, water, electricity, gas etc, again items that are not deductible from CG. Regards Peter

[Telometer]

Well, it all depends really, doesn't it (as to whether it's income or capital). Read up on the badges of trade.

If you already have a lettings business, and think that the current market is such that you will lose money if you hang on to the flats, then it's by no means clear that selling the flats would be a trading transaction. If you have a large portfolio you are perfectly entitled to buy and sell the properties without it being regarded as trading. On the grounds that it's only the high end value that is encouraging you towards selling, then how could it ever have been a trade that you should have registered with HMRC within 90 days of starting - you never had any intent then.

And indeed then all the revenue costs would be costs of your lettings business, so you could have your cake and eat it.

If you argue that it's capital, then don't do it repeatedly...