Loss on sale of a property - income tax or CGT

Loss on sale of a property - income tax or CGT

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Client bought a run down property in 2018 with a view to doing it up and selling it on. It was never lived in or rented out.

The plan was to buy a property, do it up and sell it and then do another property etc ...

He sold it in June 2020 but at a loss

He paid 240,000 for it including stamp duty etc. Spent 15,000 on it in 18/19 and 10,000 on it in 19/20 and net proceeds from sale in June 2020 were 255,000 so a loss of 10,000 so not a very successful venture.

Couple questions would this constitute a trading loss or a capital loss. And if it is a trading loss and goes on his 2021 tax return as a loss of 10,000 can the loss be offset against his other income? Or should it be treated as a capital loss

Replies (35)

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the sea otter
By memyself-eye
20th Nov 2020 08:55

Ask yourself where is the 'trade' in this?
"never lived in or rented out" is the clue.

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Replying to memyself-eye:
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By Justin Bryant
20th Nov 2020 09:11

Never lived in and rented out = not a CGT passive investment/property investment business.
So if it ain't those there was likely an intention to trade (at a profit) from the outset. Contrast with this case.
https://www.accountingweb.co.uk/tax/personal-tax/a-fine-line-between-inv...

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By Paul Crowley
20th Nov 2020 09:14

Sounds like an adventure in the nature of trade to me.
If there was a profit, HMRC would not dispute income tax over CGT
Intension was trade so trade it is

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Replying to Paul Crowley:
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By Justin Bryant
20th Nov 2020 09:21

Yes; and HMRC presumably check that for all those people on Homes Under the Hammer etc. bragging about their big sales profits.

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By Openhouse
20th Nov 2020 09:18

Agree should be treated as a trade. The property was sold at a loss in June 2020 so I would put this on his 2021 tax return and I believe the trading loss can be offset against his other income (he has employment income)

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By Openhouse
20th Nov 2020 09:18

Agree should be treated as a trade. The property was sold at a loss in June 2020 so I would put this on his 2021 tax return and I believe the trading loss can be offset against his other income (he has employment income)

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By Rammstein1
20th Nov 2020 09:29

I think I would want some more details first. Is he going to be doing any more properties up or has he decided it's too much hard work? Did he actually do anything with the property or just decided he couldn't be bothered and stuck it back on the market?

Also, was he registered as self employed back in 2018?

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Replying to Rammstein1:
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By whitevanman
20th Nov 2020 09:40

Agreed. Too many responders seem to overlook the fact that the trade (if it exists) must be evidenced and must be carried on on a commercial basis and with a view to realising a profit. It is not just a case of "he hoped to sell at a profit".
A lot more facts would need to be established.

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By justsotax
20th Nov 2020 09:40

hmm...

Maybe they are not very good business people.....but to purchase a property with the intention of flipping it but then taking 2 years (but only spending 25k) and as a result selling at a loss all doesn't quite fit.

Have they bought their next property....? Did they register as self employed originally....given their intention to trade....how did they report their self employment in 2018-19.....are they planning to complete a return for that year given they have been 'trading' as it is that year that presumably the loss would apply to....

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the sea otter
By memyself-eye
20th Nov 2020 10:09

I meet many folks who, retrospectively, announce an intention to trade when advised that a loss on sale could be offset.

Fact is there was no trade.

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Replying to memyself-eye:
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By Tax Dragon
20th Nov 2020 10:43

memyself-eye wrote:

Fact is there was no trade.

We don't know many facts, certainly not enough to conclude on the trade question. However, the enterprise does not sound very commercial, and relief for the loss may accordingly be restricted.

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RLI
By lionofludesch
20th Nov 2020 10:34

I vote trading with the huge caveat that much depends on the evidence.

What evidence is there ?

If any ?

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Replying to lionofludesch:
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By justsotax
20th Nov 2020 11:27

if it was a trade that commenced in 2018 I am wondering why it appears the intention it to report the 'loss' in the 2020-21 Return......surely the losses were incurred in 2018-19 and 2019-20......the house at that stage would have been trading stock....

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Replying to justsotax:
Psycho
By Wilson Philips
20th Nov 2020 11:37

*IF* it was a trade, and all costs had been taken to trading stock, then the loss would correctly be recognised in the year of disposal.

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Replying to Wilson Philips:
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By Paul Crowley
20th Nov 2020 11:52

That is what I do
But I would have the trade recognised on the tax return

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Replying to Wilson Philips:
paddle steamer
By DJKL
20th Nov 2020 12:22

There are holding costs of carrying property as trading stock that might well have not been carried within stock, interest/council tax/insurance/site security/some utility costs are all items I expense as they arise so would expect to see in the earlier year's accounts creating a loss.

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Replying to justsotax:
RLI
By lionofludesch
20th Nov 2020 11:40

Only if the trader knew or suspected he would make a loss.

If he expected a profit, the value would correctly have been carried forward at cost.

However, I'd be surprised if there weren't costs that wouldn't have been included in stock - accountancy fees for example - which thereby created a modest loss in those years.

Was anything reported ? I'm guessing no ?

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Replying to lionofludesch:
Psycho
By Wilson Philips
20th Nov 2020 12:06

Accountancy fees? What accountancy fees? :¬)

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Replying to Wilson Philips:
RLI
By lionofludesch
20th Nov 2020 12:18

Surely every business has an accountant, Wilson.

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Replying to Wilson Philips:
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By justsotax
20th Nov 2020 12:18

for preparing the 'trading' accounts?....on-going advice regarding the 'trade'....

(I wonder if the 'intention' would have been different had there been a profit.....hmmm.....)

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Replying to justsotax:
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By Tax Dragon
20th Nov 2020 12:25

That's why you have to look at the facts. All we know is bloke bought a house, spent £25k on it, and it wasn't to live in or let. Oh, and that he then sold it.

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Replying to Tax Dragon:
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By justsotax
20th Nov 2020 14:08

No denying we should have the facts, but in their absence I think it is appropriate to look at what would potentially suggest it was a trade or not. Especially relevant as Openhouse seems to be persuaded that it is a trade from some fairly sparse replies....but seems encouraged by the fact the loss can be set against employment income.......

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Replying to justsotax:
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By Tax Dragon
20th Nov 2020 14:59

justsotax wrote:

No denying we should have the facts, but in their absence I think it is appropriate to look at what would potentially suggest it was a trade or not.

I miss your point.

Openhouse presumably has the facts. We don't. Openhouse is choosing not to enlighten us. What's the point of guessing?

Worst of all worlds would be to have a one-off trading loss that gets blocked, and no capital loss to carry forward. But if that's where the facts take you, that's where you have to go.

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Replying to Tax Dragon:
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By justsotax
20th Nov 2020 15:26

I am just suggesting that providing points for openhouse to consider, when making a decision, is not unhelpful (sorry for the double negative).

At the very least if he wants to consider whether this is a trade a starting point may be to review 'badges of trade'. However it seems having asked the question (because he was unsure presumably)....within 4 messages he appears to know its a trade (without any hint that the badges of trade have been considered).

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Replying to justsotax:
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By Tax Dragon
20th Nov 2020 15:38

Ah OK.

The cynicism I saw in your posts was read into them by me. (What's happening to me?!)

I apologise for that, and see (and agree with) your point(s) now.

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Replying to justsotax:
Psycho
By Wilson Philips
20th Nov 2020 12:44

So you reckon that someone has been preparing accounts in this case, do you???

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Replying to Wilson Philips:
RLI
By lionofludesch
20th Nov 2020 12:53

Wilson Philips wrote:

So you reckon that someone has been preparing accounts in this case, do you???

He has an accountant - Openhouse.

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Replying to lionofludesch:
Psycho
By Wilson Philips
20th Nov 2020 14:18

But (a) from when? and (b) did s/he know anything about it? (And if s/he has been preparing accounts already surely s/he would already have taken a view of the appropriate tax treatment.)

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Replying to Wilson Philips:
RLI
By lionofludesch
20th Nov 2020 14:33

Who knows ?

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By Anonymous.
20th Nov 2020 11:06

I agree that there are far too few details to be able to give an informed opinion.

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Replying to Anonymous.:
Psycho
By Wilson Philips
20th Nov 2020 11:08

+1

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By jdm5454
20th Nov 2020 16:31

Scant facts so;

CGT - keep the loss for future.

Trade - Revenue start an investigation and you pay someone to argue your case. Lose some of your 10k.

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Replying to jdm5454:
RLI
By lionofludesch
20th Nov 2020 16:50

Tax on £10k.

We don't know the rate, obviously. Anything from 0% to 45%.

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By Montrose
23rd Nov 2020 12:10

What contemporary evidence is there at the time of purchase to substantiate that this was an intended trading transaction- such as correspondence with solicitors, agents bank, accountant etc?
If IT loss claimed via SA100 anticipate that HMRC will ask this question

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Replying to Montrose:
paddle steamer
By DJKL
23rd Nov 2020 12:35

Type/duration of funding may evidence intent, I would start with how this activity was funded.

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