Kirk Rice Blog

Refurbished Property Sale – What Is My Tax Position?Written on May 10, 2017 by Kirk Rice LLP

The Question:

I have recently sold my house and I am considering buying another property that needs a lot of work doing to it. I had not planned to undertake a refurbishment project, but I think there could be a good profit in doing this to provide a stepping stone to buy the type of house I really want. I assume I would not pay any tax on this profit as I will be living there whilst I undertake the refurbishment work?

Kirk Rice LLP answers:

The capital gains tax (CGT) position for a person who only owns one property and lives in it full-time is extremely simple – any gain on disposal is tax free.  The basic concept of the main residence relief, therefore, appears to be very straightforward, but this is a valuable exemption that deserves attention to detail to avoid falling foul of various tax traps. The CGT position for a refurbished property sale, may be different, depending on the circumstances, read on to find out why.

Broadly the tax law allows relief from CGT on gains arising from the disposal of:

• A property which has been your only main residence throughout its period of ownership; or
• Its garden or grounds up to the permitted area.

However, in recent years there have been a number of tax cases questioning the right to claim main residence relief, and this does seem to be an area into which HMRC are making enquiries.  The key issue seems to be that in order for relief to be obtained, the property should be purchased with a view to it becoming your “home” and in the period of residence it is quality time more than the quantity of time that is relevant.

The following are the main problem areas;

Property bought with a view to resale.

The relief is denied if the purchase was made wholly or partly with a view to realising a profit. While on a strict interpretation of the law, this could be held to apply to nearly all property purchases, HMRC normally only attacks those who buy and sell property in quick succession. In such cases it is also open to HMRC to seek to identify the transaction as trading.  It is important that the property does become your home and that this can actually be demonstrated. Key areas to consider are:

• Furnish the property conducive to the requirements of a home
• Update the council tax and electoral registers
• Ensure official correspondence is sent to the property
• Ensure the utility usage is consistent with the property being lived in

There should be some expectation of continuity in residing in the property as your home.

The garden or grounds.

The basic permitted area is 1/2 a hectare. A larger house will require a larger garden, but this is a subjective test, and has also been subject to a number of tax cases. In practice, difficulties arise when owners sell part of a plot for building and retain the balance. HMRC can argue that the land, which was sold, cannot have been ‘required’ for the enjoyment of the house since the owners have sold it. Owners contemplating selling part of their gardens should take professional advice.

Other houses in the garden or grounds.

In a leading case, the taxpayer’s gardener occupied a cottage some 570 feet away from the main house, separated from it by a large garden. The courts held that the cottage was not part of the main residence and relief was denied.

Multiple properties.

The owner of more than one property can nominate one of them as his main residence for tax purposes, by submitting the appropriate election to HMRC. This property will be entitled to main residence relief for the period covered by the election. The election has to be made within two years of the acquisition of the second property. The points to watch are:

• All the properties involved must be “residences/homes” of the taxpayer. A house which for structural reasons could not be occupied, or which in fact has always been let out, cannot be a residence;
• Married couples can only have one main residence between them.

Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875 000 in our Ascot office or Hadley Baldock on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk

If you would like to receive Kirk Rice’s Taxing Times Questions regularly by email, simply email info@kirkrice.co.uk stating Taxing Times Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.