Can flipping properties create unwelcome tax bill?

Homes under the hammer

There’s no doubt that doing up and selling properties, known as “flipping”, can be lucrative, but before you start brushing up on your DIY skills make sure you’re aware of the potential tax traps.

Tax-free gains

While many people do make a profit on the sale of their main home, it isn’t usually taxable because of private residence relief (PRR) which exempts the gain from capital gains tax (CGT). So, all you need to do is live in the property to make sure you won’t pay any tax on the sale, right?

Exception to the rule

Unfortunately, it’s not quite that simple.

Trap. The relief is not intended to relieve speculative gains or gains arising from development and the legislation specifically prevents PRR from applying where the acquisition of a property is made wholly or partly for the purpose of selling it to make a gain.

This would appear to mean that anyone who sells their home won’t get the relief, after all, nobody buys a house with the intention to sell at a loss. Luckily, HMRC guidance recognises that anyone who buys a house is likely to hope that the value will appreciate over time and that it would be unreasonable to deny relief in those circumstance. It goes on to say that relief should only be denied when the primary purpose of the acquisition was an early disposal at a profit.

Example. Danny is a kitchen fitter and purchases a cheap property that he thinks will be worth £75k more once he refurbishes it. Danny enlists the help of his friends to install a new kitchen, bathroom and flooring. He promises to pay his friends for their trouble once the property is sold. He stays in the property whilst the work is being carried out to save time. Danny sells it within a few months, making £70k profit. Despite occupying the property, Danny will not qualify for PRR because he clearly only purchased the property so he could sell it for a quick profit.

Danny is likely to be trading and so the profits would be subject to income tax not CGT.

What’s the purpose?

In order to qualify for PRR you would therefore need to show that the main reason for purchasing the property is not to quickly dispose of it at a profit, but to genuinely live there as your main home.

You can easily document your intentions in email exchanges with your solicitor or mortgage advisor.

Example. Helen purchased a flat because it was close to her office. The flat was affordable because it needed modernising throughout. Helen moves in and immediately replaces the windows and doors. Over the next six months she decorates the rest of the property and puts her personal touch on the place. Helen sells the flat so she can move in with her new boyfriend. Despite only living in the property for a short amount of time, Helen can claim PRR such that no tax is payable on the gain because she purchased the property to be closer to work, not to make a quick profit.