Q: I have just sold an investment property I bought only six months ago. It needed a lot of improvement work doing and I always intended to do it up and sell it for a profit — but I was surprised how quickly it sold and thrilled with the £50,000 I made. I know that I will have to pay capital gains tax at 28 per cent as I am a higher-rate taxpayer, but a friend says that I might have to pay 40 per tax — which would ruin everything. What is the correct rate?
© Merrily Harpur
A: If you acquire a property intending to renovate it and sell it on for a profit, then that profit is actually subject to income tax rather than capital gains tax. The reason for this is that you are deemed to be carrying on a trade of property development, rather than being an investor who is buying a property to benefit from, say, the rental income or the long-term growth in the property's value.
So, the profit you have made will be added to your income and taxed at your marginal rate of tax, which is 40 per cent for income between £35,000 and £150,000, and 50 per cent above this amount.
You will also lose the benefit of your personal allowance if the profit takes your income above £100,000.
Property investors, who aren't acting like developers, pay a maximum of 28 per cent tax on their capital gains and also benefit from an annual capital gains tax exemption of £10,600.
This news may be disappointing for you but the difference in tax rates means that you should always seek advice about how to structure your property acquisitions in advance so that you minimise the tax payable.
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Fiona is a partner in the residential real estate team at Thring LLP www.thrings.com.