Recent reports suggest that property flipping – the process of buying properties in areas where prices are rising rapidly, and selling them on quickly – is running at the highest level for 10 years. However, in a sign of the times the focus of interest seems to have moved from London and the South East to North West England.
The figures are remarkable: it is reported that, in the year ended 31 March 2017, 30,822 houses and flats worth £5.5bn were bought and sold more than once in the year. That’s an average of £178,444 per property.
So, what’s in it for the typical flipper?
Working on the footing that the typical flipped property is held for 10 months, and that property price inflation is around 6 per cent per annum in the chosen areas, that promises an average gain of around £8,922 per property.
Of course, transaction costs and stamp duty will eat into that. But it’s easy money, isn’t it? Also with the capital gains tax exemption currently running at £11,300 for 2017/18, there’s no need to bother about the taxman? Or is there?
Two tax questions spring to mind. First, does the flipper plan to briefly occupy the property, perhaps renovating it as well, and then claim the benefit of the main residence exemption when selling at a gain? If so, those hopes could be dashed. Temporary occupation of the property – a mattress in the corner of a room while the property is being renovated – won’t succeed in persuading HMRC that the main residence exemption is available. And if the taxman can show that the flipper purchased the property with the intention of a quick sale at a gain, then all hope of the main residence exemption disappears completely.
Second, what about the annual capital gains tax exemption? For isolated purchases and sales, that’s likely to be available, although care should be taken to compute the figures and to comply with normal rules on tax return disclosures. But if, year after year, the same pattern is repeated then the taxman might successfully contend that the flipping activity amounts to a trade with profits chargeable to income tax at the flipper’s top rate. Curiously, for all the money which HMRC has invested in its tax return processing software, we’re not seeing any evidence that the taxman is joining the dots by looking at a regular pattern of capital gains tax disposals in successive tax returns; and arguing that the activity amounts to trading with profits taxable at income tax rates.
This is all the more surprising because new rules make it easier for HMRC to argue that property transactions amount to trading.
So, flippers, beware. Regular quick-fire purchases and sales of properties are likely to land you with an unwelcome income tax bill in the future.
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