Property Trading

Property Trading

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I have a client who acquired a property for £450,000 and redeveloped the property costing £80,000 and is about to sell the property for £875,000

Once sold thge client will purchase a second property for £430,000 which he intends to redevelope and let out.

The first property is no doubt a trade whilst I beleive the second property will be graded as an investment property.

The first property was purchased in 2013/14 and the sale and puchase of the second property with take palce in 2014/15.

The client has been 'advised' that there should be no profit/tax on the disposal of the first property because he acquired a second property and has computed this as follows:

Disposal proceeds                                     £875,000

Cost Property (1)            £450,000

Cost Property (2)            £430,000              £880,000 

Assessable Profit                                      £0

Should not the computation reflect that property (2) is in 'stock' at the accounting date making the calculation:

Disposal Proceeds                                    £875,000

Cost Property (1)           £450,000

Cost Property (2)           £430,000

                                    £880,000

Less Closing Stock

Property (2)                   £(430,000)               £450,000

Assessable Profit                                         £425,000 *

* less associated costs, redevelepoment, etc

Thank you

Replies (3)

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By johngroganjga
13th Nov 2014 11:56

Yes of course it's not right to write off the cost of the new property against the sale proceeds of the old one.  That's true whether the old one is trading stock or an investment property.

PS (EDIT) Does your client perhaps think that the sale of the first property will generate a capital gain which can be covered with some sort of rollover or reinvestment relief?

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By VAt the Impaler
14th Nov 2014 09:40

Property Trading

Thank you.... my thoughts exactly !

As you can imagine, (the client), having been told that there is 'no profit and thus no liability' it has been an uphill struggle trying to advise him otherwise !

Your confirmation will add greatly to my 'case' when I (again) give the client the 'good news' !

... no, the client accepts that the project was 'trading'

Many Thanks

 

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By awoodj
14th Nov 2014 10:34

If only

Talk about wishful thinking, simplifying a little, you add an asset and reduce cash the net effect is zero and so is the effect on any existing profit. So if you had a profit before you bought the second property, you still have it after you buy the second property, no change.

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