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Property companies and capital gains

Is capital gains due on the sale of a property dealing with buyng and selling

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Our clients are an LLP and their business is buying, renting and selling properties.  We are currently doing their year end accounts and as they have sold a property should we make a seperate capital gains calculation.

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By Tax Dragon
29th Apr 2020 12:29

Do you need to know the capital gain?

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Replying to Tax Dragon:
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By Jan Hobbs
29th Apr 2020 13:18

We already know the gain - so no. My question is purely in respect of completing the tax return.
Thank you.

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Replying to Jan Hobbs:
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By Jan Hobbs
29th Apr 2020 13:32

I think I've found the answer - its an LLP so the gain will need to be shown on each partners tax return.
Thanks for your earlier reply.

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Replying to Jan Hobbs:
JCACE
By jcace
29th Apr 2020 14:15

Are you sure that it should be reported as a gain and not as trading income? You say in your question that the business includes buying and selling properties.

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Replying to jcace:
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By Jan Hobbs
29th Apr 2020 14:39

No and this is my dilemma. The LLP has purchased 12 properties, mostly shops and offices, over a period of 7 years. Everything has been rented out since then. this is the first year that a sale has been recorded. How do you determine 'intent of trade'? Looking at the overall business I am minded to take the view that the main intent is letting.

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By ireallyshouldknowthisbut
29th Apr 2020 14:09

Surely its a question of intention of the trade?

Is the rental incidental to the property trading, or is it the other way around?

Or are are both property trading and renting as two businesses inside of one LLP?

You mention in your opening post "buying renting and selling" which is ambiguous so its not possible to answer the question correctly.

It would clearly have very significant tax effects if you muddle this up.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
29th Apr 2020 14:30

Hence my opening reply.

Also odd that the question was, apparently, about tax returns, but didn't mention tax returns.

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Replying to Tax Dragon:
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By Jan Hobbs
29th Apr 2020 14:47

This does obviously affect how the accounts are presented. The properties are registered to the LLP and every property has been added to the business assets in the year of purchase. Depending on how the proceeds of the sale are treated, either income or disposal, will determine how both the SA800 and partners SA returns are completed.

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Replying to ireallyshouldknowthisbut:
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By Jan Hobbs
29th Apr 2020 14:39

This is my dilemma. The LLP has purchased 12 properties, mostly shops and offices, over a period of 7 years. Everything has been rented out since then. this is the first year that a sale has been recorded. How do you determine 'intent of trade'? Looking at the overall business I am minded to take the view that the main intent is letting.

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Replying to Jan Hobbs:
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By Tax Dragon
29th Apr 2020 14:42

Have you looked at the accounts?

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Replying to Tax Dragon:
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By Jan Hobbs
29th Apr 2020 15:00

I am preparing the accounts.......

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Replying to Jan Hobbs:
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By Tax Dragon
29th Apr 2020 15:36

And how have you treated it for the past seven years?

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Psycho
By Wilson Philips
29th Apr 2020 15:49

If the client's business is selling properties why has it taken 7 years for them to do so?

As already suggested, how have you treated the properties in the accounts over the last 7 years, and on what basis?

"How do you determine 'intent of trade'?" How about asking the client?

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By PandoraSleeps
29th Apr 2020 16:07

I think the key is what the client's intentions were when they first bought the property. Did they buy it with the intention of letting it (in which case it should be in the accounts as tangible fixed assets, investment property) or developing / selling it (in which case in the accounts as stock / WIP)? If intentions change then property can be moved between these two classifications but there can be tax consequences of doing so. Is there evidence to support the client's original intention and any subsequent changes?

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By fawltybasil2575
29th Apr 2020 16:53

@ Jan Hobbs (OP)

Notwithstanding later references, in the text of your initial question, to rental income, I am (at the risk of causing offence) concerned at your initial subsidiary question:-

“Is capital gains due on the sale of a property dealing with buying and selling”

I have difficulty in reconciling this question (in which there is no reference to any intention to rent out) with your later posts in which you appear to state, to the contrary, that the properties have throughout been purely for renting out.

Your responses to the questions raised by earlier esteemed posters above should however throw some light, but perhaps you could comment, in your responses, upon the apparent anomaly to which I have referred above.

Please include, in your responses, specific detail in relation to the property which was sold, ie the date of purchase, the “intentions” for that property throughout its ownership, and whether it was included in the Financial Statements as an Investment Property or alternatively Trading Stock.

The key throughout has been the client partnership's intentions, which should have been queried when the Financial Statements were prepared EACH year (albeit one would "sense check" their responses to those queries before signing off those Financial Statements).

Basil.

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Replying to fawltybasil2575:
By ireallyshouldknowthisbut
29th Apr 2020 18:20

Basil has as ever got to the nub of the issue.

Whilst the other properties may or may not give some indication of the ordinary nature of trade, specific to the one that was sold, what are the circumstances surrounding its acquisition and disposal?

Was is bought speculatively in the nature of trade?
Or was it rented out for many years, and (for example) the tennant made an offer too good to refuse?

That is the relevant accounting and tax issue.

Of course in practice there can be any one of a number of circumstances such as buying a parade of shops for letting, and selling off the flats above in which case it gets more interesting still.

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By Montrose
30th Apr 2020 18:36

Although documentary evidence is not decisive:=
What are the objects of the LLP?
How have the properties been shown in the LLP accounts over the years?
Are there any minutes of meetings or contemporary notes made when the property concerned was acquired?
Instructions to conveyancing solicitors?

If all the documentation is consistent and shows no evidence of intention to trade, then I would argue that CGT applies.

Counterwise, is there anything in documents surrounding the sale that suggests a change in the situation, such as applying for planning permission?

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