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If you buy a property with the intention of selling it on at a profit in the short term, then even if you receive some rental income from it while you own it, you are trading and your profit from selling the property will be charged to Income Tax – and to National Insurance Contributions (NICs).
In this series of blog posts, we shall look at the tax treatment of:
- “Turnarounds” where a property is bought (perhaps at an auction) and sold at a profit with little or no work done on it.
- “Refurbs” where a property is bought, significantly altered (perhaps by being converted into flats, or by being extensively renovated), and then sold at a profit.
- New builds”, where a new property is built and sold.
Notifying HMRC you have Started Trading
Notification:
When you begin to trade, you should notify HMRC immediately – and certainly by 5 October of the tax year following. If you do not do so, there are potentially quite severe penalties for longer delays.
The simplest way to register is to visit the “Self-Assessment” page on HMRC’s part of the GOV.UK website.
National Insurance (NI) Contributions for Trading in Property
A trader is liable to pay “Class 4” NIC on his profits.
In addition to Class 4 NIC, you are also required to pay “Class 2” NIC, calculated at a rate of £3.05 per week and recently amended so that, by default, it will be collected alongside Class 4 NIC and income tax on your self-assessment return.
While Class 2 NICs were previously scheduled to be abolished, they will now be retained at least throughout the current parliament. This is because they ‘earn’ a credit for State Pension and, while Class 4 NICs were supposed to take over that role, they are not triggered until earnings reach £9,568, leaving ‘lower’ earners able to garner a State Pension record only by paying voluntary Class 3 NICs which are much more expensive at £15.40 a week. The government has said it would retain Class 2 contributions until a better alternative could be found for lower earners.
If you ring the Newly Self-Employed Helpline, (0300 200 3504), you should be sent full details of all of this.
If you are also an employee, it may be possible to reduce your Class 4 NIC. For example, if you are already paying the maximum employee NI contributions through PAYE on your salary, (which you will be if your earnings exceed £50,270 in 2021/22), then your Class 4 NICs will be limited to just 2% of profits over the Lower Profits Limit (£9,568 in 2021/22). If your NIC’able earnings from employment are less than the Upper Earnings Limit of £50,270, then a proportion of your self-employed earnings will be exposed to the 9% “full” rate, etc.
Income Tax and NIC for the Property Developer
The following case study illustrates how Income Tax and NIC are charged on a property developer’s profits:
Case Study: Charging of Income Tax and NIC
Simone sets herself up as a property developer, buying a rundown house on 6 April 2021 for £70,000. She spends £30,000 on renovation work and sells the house on 1st March 2022 for £160,000.
She has made a trading profit of £60,000. Assuming she has no other income for 2021/22, her profit will be taxed as follows:
New £1,000 Allowances for Trading in Property – Guard Your Losses
The Finance (No.2) Act 2017 included two new Allowances, each of £1,000. From 2017/18 onwards, the Trading Allowance covers trading and casual income, while the Property Allowance covers income from letting, for example allowing other people to park their car on one’s drive during the working day. The Allowances are aimed at removing modest income sources from the tax regime.
As regards the Trading Allowance, where gross income (not net profit!) from trading or casual income is less than £1,000 in the tax year, then any income and expenses are just ignored.
Where gross income exceeds £1,000 then it is possible to claim the £1,000 Allowance instead of actual expenses – useful if income is a little above £1,000, and actual expenses are minimal.
The same approach applies to the Property Allowance in relation to income from property.
Property developers are unlikely to benefit from the Trading Allowance: their incomes and expenses are likely to be well in excess of £1,000. If, however, a property developer was to have only minimal income in a year but (say) substantial expenses, note that it is technically possible to forfeit your losses where income is less than £1,000, since the Allowance will be granted automatically, and any expenses ignored – even if they result in net losses. It is, however, possible to elect to disapply the regime, so as to claim your losses in full.
There are similar rules for the Property Allowance; neither Allowance may be claimed against income that is, or could be, subject to Rent a Room relief.
If you’ve enjoyed this post, check back for the next instalment of Tax Tips for Trading in Property where we will be discussing property development and limited companies, accounts and records, and the construction industry scheme otherwise known as the CIS.
