A story was recently included in the Sun about a couple who claim to be ‘Britain’s best house flippers’ (link to the article below). In a nutshell, the article explains how the couple have made a ‘tidy’ £472,461 by flipping 9 houses in 12 years. They are described as ‘serial renovators’ who ‘sometimes only spend months in a property before fixing it up and moving on to the next project’.
Although no mention was made of tax in this article, this did remind me of a common misconception which some property developers have, that profits can be enjoyed tax-free as long as you live in the house.
Principal Private Residence (‘PPR’) relief generally allows taxpayers to keep gains arising on the disposal of a property, which has been used as that person’s only or main residence, out of the capital gains tax regime.
For the vast majority of homeowners, this exemption means that there is no capital gains tax payable and no requirement to file a tax return just because of their house disposal. Some fairly common ‘pub tax advice’ is that individuals can avoid tax on properties that they develop by ensuring that they live in them. The purpose of this tax bite is to dispel that myth.
How does PPR relief apply to individual property developers?
It is not uncommon for individuals to acquire property, renovate it and then subsequently sell it within a short timeframe. However, there will be a big difference in the tax treatment on sale depending on the facts surrounding the acquisition.
PPR relief is only available in respect of capital transactions and is, therefore, not applicable to trading transactions which are subject to income tax.
Although possibly not needed, there is also legislation within the PPR relief rules (section 224(3) TCGA 1992) which states that PPR relief will 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 disposal’. This clause is perhaps anticipating a scenario which is not quite trading, but where there is still a significant profit motive (although in practice we have not seen it applied).
HMRC will consider a range of factors when raising an enquiry into a PPR relief claim, including:
• The type of property;
• The length of the period of ownership;
• The frequency or number of similar transactions by the same person;
• Supplementary work completed on the property;
• The circumstances that were responsible for the sale;
• Is the tax-payer involved in the property development trade? and
• The motive.
Consequently, where individuals claim PPR relief in respect of a property which they only lived in for a short space of time, they should ensure they have sufficient evidence of the circumstances that made them want to sell, as HMRC would be likely to request this. Also, if the taxpayer has a track record of serially buying and selling houses (and claiming PPR relief) then the enquiry could go back many years (sometimes up to 20).
Forbes Dawson view
Although there is no reason to suspect that the couple in the article have been claiming PPR relief on the profits, it would not be surprising if HMRC were to run a check on their recent returns, with a view to raising an enquiry if irregularities are identified. I have already seen lots of speculation on social media about whether they have courted an unwelcome approach from HMRC! For the technical reasons outlined above, I always think that it is strange that tax returns do not require details of PPR disposals to be disclosed…
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