The DIY Property Magnate
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Originally published 5 December 2007
It is fair to say that the “property owner” client sector forms a large part
of the client base of all firms who advise on tax and there is great scope to
attract new property clients to those firms.
For the smaller organisations this type of client is interesting, varied,
demanding and often unaware of potential tax problems, potential tax planning
and potential tax savings.
What has caused the growth of this property sector? The influence of
television programmes such as “Changing Rooms” and “Property Ladder”. What about
the impact of the property price boom and the availability of mortgages and
relatively low interest rates? Enthusiasm for the market has been bolstered by
the much discussed city bonuses. Children in their 40s, 50s and 60s have parents
who are now not just leaving two tins when they die, one marked “funeral” and
the other marked “funeral party” – there is often substantial property in the
Estate and a lot of associated planning.
Ten year rule – inherited property
The inheritance tax rules have the advantage of a ten year payment term over
ten years. But many clients forget that this crystallises when the property is
It would be easy to focus on “buy to lets” (BTLs) but there are permutations
and combinations of client tax problems in all areas of the small property
investor, speculator and trader – how can we help these clients?
Dwelling house rebuilds and flat conversions
With the housing shortage reaching critical levels and the need for more
affordable housing increasing it is becoming rather popular for certain home
owners to consider either converting their homes into flats or possibly knocking
down the whole house and building a block of flats or affordable housing on the
There would appear to be some confusion as to what taxes are involved with
such a project and conflicting advice appears to be being given in relation to
the possible profits and gains made from the project. Some may say that this is
a trade and taxed as income, some may say that it is S756 ITA 2007 (S776 ICTA
1988) and some may say it is tax free. The actual legislation that comes into
force is S224(3) TCGA 1992.
Taxing the profits of property conversions – S224(3) TCGA 1992
S224 Amount of relief: further provisions
(3) Section 223 shall not apply in relation to a gain if the acquisition
of, or of the interest in, the dwelling-house or the part of a dwelling-house
was made wholly or partly for the purpose of realising a gain from the disposal
of it, and shall not apply in relation to a gain so far as attributable to any
expenditure which was incurred after the beginning of the period of ownership
and was incurred wholly or partly for the purpose of realising a gain from the
This section of the principal private residence (PPR) relief provisions
basically enables HM Revenue & Customs (HMRC) to adjust the level of PPR
available on the sale of property that has been sold wholly or partly for the
purpose of realising a gain.
Just an extension?
Before anyone panics and decides not to build the extension for the kitchen
or landscape the garden, the rules are in place to capture those who enhance
their properties for profit and not those who wish to improve their homes and
enjoy their improvements. An example of those who would be captured would be
those who build an extension and sell the property immediately to benefit from
the increase in value of the property.
An even better example would be those who renovate their house into two
The rules for applying S224(3) TCGA 1992 do not just apply to visual changes
to the property but also financial changes. As per guidance given by HMRC at
CG65257 if your client purchases the freehold of their flat to enhance the value
of the property before sale, the profit will be captured and PPR will be
Renovation for a profit?
There may be cases where people have not renovated their properties for
profit but have been forced by other reasons to sell their properties. If the
taxpayer can prove that the motive to sell was not for profit then he should
avoid the rules. An example of this would be clients who run out of money for a
project and have to sell. However, it would not be possible for this misfortune
to be used in a flat conversion due to the obvious motives behind the project,
although, if you were creating a flat for granny this could possibly avoid the
Purchase of a property with a view to profit – S756 ITA 2007 (Old S776
Any property purchased with the profit motive in mind could be caught under
To silence those who fear the horrors of S756 ITA 2007 (old S776 ICTA 1988
rules) which convert capital gains into income gains this legislation cannot
come into force because S767 ITA 2007 basically says that if the property falls
under CGT legislation regarding principal private residence at S222 to S226 TCGA
1992 then S756 ITA 2007 cannot apply.
Adventure in the nature of a trade
This is a very interesting question and one in which I think that those
knocking down their houses may come unstuck. The knocking down of a house and
building of a new house or flats to sell is most likely to be ‘an adventure in
the nature of a trade’ and as such any profits earned from such a venture should
be taxed as a property development business.
How the capital gains and income tax would operate in such a case would be
similar to the rules under S756 ITA 2007 and effectively the client would have a
mixed capital gains tax and income tax liability at the date of sale of the
developed property. S765 ITA 2007 confirms that the part of the income made on
sale which is fairly attributable to a period before the intention to develop
was formed is exempt from income tax and therefore this would be taxed under
capital gains tax rules. This principle would no doubt be applied in the case of
The property would be entered into the property development business as stock
at the market value and all costs and sales dealt with through a profit and loss
account. Simple! But what if the client is going to live in one of those houses
or flats? This is where it all becomes extremely complex and ‘true and fair’
principles need to be applied.
Principal private residence – the large garden
Disposal of part of the garden structured correctly can be tax free under the
PPR rules of half-a-hectare or if larger provided it meets the “character
appropriate” rules. To take full advantage of PPR on the large garden there has
to be a sale for development as opposed to self development which would be
caught under S224(3) CGTA 1992.
The Buy to Let (BTL)
Many BTL owners have purchased via a mortgage where the interest and expenses
exceeds the income. The negative income position leads the owner to consider
that there is no need to disclose the income stream to HMRC. This creates a huge
market of potential tax clients that need tax help with non-disclosure,
unclaimed losses, future CGT problems and possible FHL conversion.
Furnished holiday lets (FHL)
Most tax advisers are well versed in the income tax rules of FHLs but what of
Business Property Relief (BPR)? BPR can be achieved on one FHL property provided
that all the business services conditions are achieved. This can make vast
differences to a family who inherit a FHL and want to keep the property in the
family without large inheritance tax (IHT) penalties. The key is the provision
of services. Please remind clients now of the future benefit. The need to keep
photographic, contemporaneous evidence of the “meet and greet” can prove very
Rolling over a gain into a FHL
If a business gain is rolled over into the purchase of a FHL tax planning can
be achieved around the future status of the property.
The FHL can change status to a normal furnished let and CGT will only
crystallise upon the disposal.
The FHL (with the rolled over gain) can be gifted to the owner’s children
with a holdover election as a business asset. The child can then use the PPR
provisions to minimise CGT on disposal. The potential for efficient interaction
of FHL and PPR is huge.
Many taxpayers are entering the Tax Return compliance and tax planning
markets due to the growth of the smaller property investor. Strong links should
be formed with our local estate agents and conveyancing solicitor to attract the
new client and make them aware of the advice on offer.
Many existing clients are “developing” (excuse the pun) their property
portfolios and again need compliance and planning help. Have they recently been
asked about their expanding property interests? There is strong marketing
potential to capture and serve these clients and one thing is certain, this DIY
property magnate client base will not be dull and undemanding.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West Street,
Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. The third edition of Tax
Planning For Farm and Land Diversification is currently being written and will
be published shortly. To order a copy call Tottel Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2008-01-09 16:06:16 in Tax Articles