22.11.2020

Doing up properties – Are you trading?

There can be money to be made buying a property in a dilapidated state, renovating it, and selling it for a profit. However, when it comes to tax, it is important to know whether the ‘profit’ element is a capital gain or a trading profit. This will determine how it is taxed and at what rate.

Trading or investment

The tax consequences will depend on whether the property is an investment or whether there is a trade. The question is whether you are a property developer or a property investor.

Much of it comes down to your intention when you bought the property. If the aim was to buy the property, do it up and then let it out, the property will count as an investment property. However, if the intention is to buy, renovate and sell at a profit, HMRC may regard you as trading. However, an intention to sell at a profit at some point in the future does not automatically mean you are trading. Also plans change, and a property purchased as a long-term investment might be sold after a relatively short period of time as a result of a change in personal circumstances.

Badges of trade

The concept of the ‘badges of trade’ has been developed from case law and provides something of a checklist which can be used to determine whether an activity is a trade or an investment. The six badges of trade are as follows:

  1. The subject matter of the transaction.
  2. The length of the period of ownership.
  3. The frequency or number of similar transactions.
  4. Reasons for the sale.
  5. Motive when acquiring the asset.

Where there is a trade, the property will only be held for as long as it takes to do up and sell. A property developer is likely to develop more than one property, either simultaneously or in succession. Where there is a trade, the property will be sold to realise a profit; for an investment property, the sale may be triggered by other factors.

Case study 1

Paul inherits some money and invests in a property, which he plans to do up and rent out. He completes the renovations and rents out the property for six years before selling it to enable him to buy a larger family home.

The property was purchased as an investment and would be regarded as an investment property. The gain on sale would be liable to capital gains tax.

Case study 2

Mark sees a run-down property on the market and spots the opportunity to make a profit. He buys the property, spends six months renovating it, selling once complete, making a profit of £40,000. He invests the proceeds in another property to renovate and sell.

Mark would be treated as trading. His aim is to sell the properties at a profit. Consequently, he would be liable to income tax rather than capital gains tax on the profit.

SEISS extended again

The Self Employment Income Support Scheme (SEISS) provided help to the self-employed whose businesses were adversely affected by Coronavirus. The second payment under the scheme, which was payable from mid-August, was due to be the final payment under the scheme. 

However, as cases continue to rise and many businesses continue to be adversely affected by the virus, the scheme has been extended. The extension will run for six months from 1 November and will provide for two further grant payments, albeit at a much lower level than previously. Following the announcement of the national lockdown in England from 5 November 2020 to 2 December 2020, the level of the first grant was further increased.

Eligibility

To claim a grant under the extended SEISS, self-employed individuals (including individual members of partnerships) must:

  • be currently eligible for the SEISS scheme (although it is not necessary to have claimed either the first or the second grant);
  • declare that they are currently actively trading and intend to continue to trade; and
  • declare that they are impacted by reduced demand due to Coronavirus in the qualifying period, which is between 1 November and the date of the claim).

To recap, to be currently eligible under the SEISS, the trade must:

  • have submitted their self-assessment tax return for 2018/19 by 23 April 2020;
  • traded in 2019/20;
  • be continuing to trade when they claim the grant, or would be except for the Coronavirus pandemic; and
  • intend to continue to trade in 2020/21.

The grant is limited to traders whose trading profits are not more than £50,000 either for 2018/19 or on average for the three years 2016/17 to 2018/19 inclusive. Profits from self-employment must also comprise at least 50% of the individual’s income.

Amount of the grant

Each grant will cover a three-month period. The first grant will cover the period from 1 November 2020 to 31 January 2021 and the second grant will cover the period from 1 February 2021 to 30 April 2021. 

Self-employed traders will receive 80% of their average monthly profits for November and 40% of their average monthly profits for December and January. This means that the The first grant will be worth 55% of three months’ average trading profits over 2016/17, 2017/18 and 2018/19, capped at £5,150. The level of the second grant has yet to be set. Grant payments are taxable and liable for National Insurance.

HMRC are to provide details as to how claims can be made in due course.

Contact us if you have any questions.

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Furlough Scheme extended

Following the Prime Minister’s announcement that England will enter a national lockdown from 5 November 2020 to 2 December 2020, the Coronavirus Job Retention Scheme, which was due to come to an end on 31 October 2020, has been extended for a month and will continue to be available during November. As a result, the Job Support Scheme, which was due to replace the Coronavirus Job Retention Scheme from 1 November 2020, has been put on hold.

Extended scheme

Under the Coronavirus Job Retention Scheme, as extended, furloughed employees will receive 80% of their pay, capped at £2,500 a month. Employees who are flexibly furloughed will receive 80% of their pay for their furloughed hours subject to the cap.

The grant will be set at 80% of the employee’s pay for their furloughed hours, subject to the cap of £2,500 for the month. The full amount of the grant must be paid over the to employee. Unlike September and October, the employer will not be required to top up the grant; however, employers will have to pay the employer’s National Insurance on the grant, and also any employer pension contributions due under auto-enrolment.

Eligibility

To be eligible for a grant under the scheme, the employee must have been on the employer’s payroll at 23.59 on 30 October 2020 and an RTI submission made to HMRC in respect of the employee. Employees who were on the payroll at 23 September 2020 and in respect of whom an RTI submission was made, but who stopped working for the employer after this date or who were made redundant, can also benefit from the scheme if their employer re-employs them.

Please contact us if you have any questions.