The fundamental point here is that the ex-tax inspector, Martin Woolner (62) is a higher rate taxpayer and complains in the media that he has to pay capital gains tax (CGT) at 28% on any gain he makes on selling property other than a main home following the recent emergency budget. He also told the Daily Mail that he is a full time property developer and is now restoring a second property.
The paper recounts how he and his wife paid £116,000 for a derelict 19th century chapel in Norfolk as a second home. Planning permission was granted to change the use of the chapel to a residential property.
Mr Woolner carried out most of the work himself and now hopes to sell the chapel for £299,000 after struggling to find a buyer at £330,000. CGT of £5,000 equates to a taxable gain of about £17,850.
Playing by Property Tax Rules
The question comes down to applying property tax rules – is Mr Woolner a developer who should pay income tax on his profits at 40% or is he an investor who should pay CGT at 28%?
The general rule is that whether income tax or CGT is due depends on the taxpayer’s intention when they took over ownership of a property:
- Buying to let by renting out a property suggests the intention was investment and any gain in value is subject to CGT;
- Buying to profit from a sale often leans toward property development and the profits are taxed under Income Tax rules.
If the intention is unclear, then other factors are considered:
• How was the property financed?
Well, we don’t know that one, so let’s go further down the list, but Mr Woolner did tell the Daily Mail he was investing from his pension.
• Did the property generate rental income?
That’s a no.
• Was the property owned for a long period?
The chapel was bought in October 2005, work started in November 2006 and was completed in June 2008 and the chapel has been on the market for a year or so. In property investment terms, most people would consider this a short term of ownership.
• Why is the property for sale?
Not really answered in the media.
• Business structure
Well, Mr Woolner kindly discloses he is now a full time property developer – a trade where profits are subject to Income Tax.
If this case went before the tax tribunal, a decision would be made on the ‘balance of probabilities’ – that is if a reasonable person considered the evidence, would they conclude Mr Woolner refurbished the chapel as an investor or a developer?
The answer would dictate how tax is applied. The difference is a £5,000 CGT bill or income tax of about £16,000 on profits of £40,000 or so, once capital gains reliefs and allowances are added back to the chargeable gain.
Of course, there is no suggestion that Mr Woolner is anything other than open and honest – but for other taxpayers, a glimpse behind the curtain to see how a former tax inspector applies the law to his own circumstances is well worth the look for someone else in similar circumstances.
Keep notes of why you buy a property and back them up with other evidence, like a rental assessment for a buy to let. If you don’t and sell quickly for some reason, the taxman may argue that you are a developer and not an investor and you could end up paying more tax than you should.