Buying a property in order to renovate and sell on is a fast growing appeal to many people. However, it is not always clear whether a person is investing or trading and the tax consequences are very different.

Trading

Trading in property involves buying a house with the intent to sell in order to re-invest your profit into another property. This process can continue for as long as the individual wishes with the hope of each time creating a larger profit for themselves.

Investing

Investing describes the act of buying a property with the intention to keep it on a long-term basis and rent it out.  This being said property investment is not always smooth sailing and there may come a circumstance in which an individual would have to suddenly sell their property. This type of circumstance is what can cause confusion for the taxman.

Types of tax

  1. Investment property – This falls under the tax rates of capital gain where the rates are 18% if the taxpayer is basic rate or 28% where the taxpayer is higher rate.
  2. Trading property – This falls under the tax rate of income tax. This rate lies at 20% for basic rate tax payers, 40% for higher rate tax payers and 45% for additional tax payers.

How do HMRC solve this?

HMRC will consider a number of factors in order to determine the intent of an investor. These include the length of time the property was held for, whether the property has been rented out and if the sale was a one-off. Using this information they will then determine if the taxpayer is investing or trading.

What should I do?

When investing in property it is vital that you make your intentions clear from the outset. This will ensure you are never caught out by any tax consiquences.