Property Sales Campaign To Flip or not to Flip?

The HMRC are trying to get revenue from anywhere

House flipping is in essence, buying a property with the intention to sell it for a profit and on 9th August, the first stage of HMRC’s Property Sales Campaign to pick up unpaid tax on flipping will be over. Anyone who has not voluntarily come forward and admitted that they have not declared a capital gain on the sale of a second property (i.e. one that is not their principal place of residence or PPR) will not be able to benefit from the preferential terms being offered by HMRC.

HMRC’s website does not actually state what those terms are, but my understanding is that anyone coming forward will still be faced with paying the tax due, plus interest, but with a reduced penalty of 20% and being permitted to pay by instalments. Waiting until after the deadline to own up could see that penalty rise to 100% plus there is the threat of criminal prosecution, though the possibility of such prosecution is very low.

The Property Sales Campaign is based on HMRC cross-checking SDLT (Stamp Duty) returns from April 2007 onwards against self assessment records to highlight potentially undeclared gains. With property prices having fallen since 2007, the CGT (Capital Gains Tax) yield is likely to be modest and what HMRC is really hoping for is that should a capital gain be discovered then that will also produce further tax in the form of tax on lettings not previously declared.

For most individuals, PPR is one of those areas of tax law where we all think we know the rules when in reality it is easy to fall unwittingly into a tax trap so a few words of explanation may help.

PPR Explained

We are so used to saying that the sale of a main residence is CGT-free that we are in danger of forgetting that there are two key conditions for a claim to be guaranteed to be successful:-

• The property must not have been purchased for the sole reason of making a profit
• The property must be an individual’s only or main residence throughout the period of ownership

If these two conditions aren’t fully met then the property owner’s intention is the key point with PPR claims. I have heard many times the cry from a client “but it is my own home”, when in reality at least part of the gain is liable to CGT. PPR is the most useful and complete exemption from CGT on any gain made on the sale or gift of a property and by the simple means of a signature on a piece of paper at your solicitors or a claim made on your tax return can potentially reduce or eliminate the tax bill on the sale of their properties.

The main points to consider are how the house was used; was it your main home, has it been let out or left empty, have you owned another property, or even rented one, at the same time as you owned the one that has been sold? If you have never lived in the house as your main home, then you are unlikely to be eligible for PPR.

If however you have lived in it as your main home for some of the time, you will be entitled to some PPR, but it is important to note that the quality of occupation and intention matter more than simply the length of time. A relatively short period actually living in a house as a home, with the initial intention to occupy the house for the long-term, can establish the right to some PPR. If your plans change and you leave the house after a few months you should still be eligible for PPR.

When a property qualifies as a principal private residence for CGT, then the following reliefs could also be very useful:

1. You are treated as living there, and are therefore entitled to PPR, during the last 36 months for which you own the property even if you are not actually living there. (This was introduced to allow people time to sell their previous home when they moved)
2. You can be away from the property for work reasons for 4 years without restriction if working abroad or for 3 years for any other reason and still qualify for these periods so long as you re-occupy the property as your principal private residence after the absence; unless your employment prevents re-occupation of the property when this rule is relaxed.
3. You can get a special relief if you let your property as residential accommodation. Letting relief applies where a house that has been your main private residence is let as residential accommodation. The letting can be before or after the time you occupy it as your principal private residence. Normally CGT would be payable when you sell a property which is rented out, but this special relief means that any capital gain which would be charged to tax for the period when the house is let out, is reduced by up to £40,000.

If there is still a capital gain after all these aspects have been taken into account, then the annual capital gains tax exemption of £10,900 (£21,800 if jointly owned) may cover what is left.

Care is needed on separation or divorce as when one person moves out of the family home this can put at risk the CGT private residence relief on their share of the property. The rules are complex and it would be best to take advice from an accountant under these circumstances as mistakes with capital gains tax can be very expensive

PPR Election

HMRC is increasingly seeking to disallow the election on second properties, because they are coming across more and more cases where the owner’s intention has always been to claim PPR on properties originally only intended for rental or to make a profit. It is not possible to nominate any old property as the PPR, it must have been your residence at some point.

Although the rules state that the owner must have actually lived in the property there is no set time limit for doing and this is where the complexions start.

Unless your circumstances clearly qualify for one of the reliefs shown above the tax situation on a second property can be a nightmare to work out. So if your situation is not crystal clear and falls into the more complex area of tax, get some professional advice; it could save you thousands!

David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and a graduate of Liverpool Collegiate Grammar School, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David’s depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into on Shropshire’s most respected Accountancy Practice. Email David