Tax liability from a land sale
Discussion
My father and I recently purchased some land with a view to selling on in a few months time. What we are not sure about is what will our tax liability be on the profits of the sale.
If we hypothetically purchased it at 70k and sold it at 150k, what way will the tax payable on the 80k work?
If we hypothetically purchased it at 70k and sold it at 150k, what way will the tax payable on the 80k work?
On the assumption that it is owned equally, the £80,000 profit is split equally with each individual being assessed on £40,000.
The profit would be taxed under the Capital Gains Tax rules so you would not pay tax on the full £40,000.
First, you can offset against your share of the gain the Annual Capital Gains Tax allowance which, for this tax year (2013/14)is £10,900. You can also offset against the "gain" any costs incurred in developing the land and any costs incurred in selling the land - such as agent's fees, solicitors fees etc.
After all these deductions, what is left over is taxed at either 18% (if you are a basic rate taxpayer) or 28% if you are a higher rate tax payer.
If the gain itself elevates you from being a basic rate taxpayer into being a higher rate taxpayer, part of the gain will be taxed at 18% and the remainder will be taxed at 28%.
This means that yourself and your father will not have the same tax bill arising from the same profit made on the sale of the land because your personal tax situation will not be identical to your father's.
The profit would be taxed under the Capital Gains Tax rules so you would not pay tax on the full £40,000.
First, you can offset against your share of the gain the Annual Capital Gains Tax allowance which, for this tax year (2013/14)is £10,900. You can also offset against the "gain" any costs incurred in developing the land and any costs incurred in selling the land - such as agent's fees, solicitors fees etc.
After all these deductions, what is left over is taxed at either 18% (if you are a basic rate taxpayer) or 28% if you are a higher rate tax payer.
If the gain itself elevates you from being a basic rate taxpayer into being a higher rate taxpayer, part of the gain will be taxed at 18% and the remainder will be taxed at 28%.
This means that yourself and your father will not have the same tax bill arising from the same profit made on the sale of the land because your personal tax situation will not be identical to your father's.
Eric Mc said:
On the assumption that it is owned equally, the £80,000 profit is split equally with each individual being assessed on £40,000.
The profit would be taxed under the Capital Gains Tax rules so you would not pay tax on the full £40,000.
First, you can offset against your share of the gain the Annual Capital Gains Tax allowance which, for this tax year (2013/14)is £10,900. You can also offset against the "gain" any costs incurred in developing the land and any costs incurred in selling the land - such as agent's fees, solicitors fees etc.
After all these deductions, what is left over is taxed at either 18% (if you are a basic rate taxpayer) or 28% if you are a higher rate tax payer.
If the gain itself elevates you from being a basic rate taxpayer into being a higher rate taxpayer, part of the gain will be taxed at 18% and the remainder will be taxed at 28%.
This means that yourself and your father will not have the same tax bill arising from the same profit made on the sale of the land because your personal tax situation will not be identical to your father's.
I am not so sure that this would be seen as a CGT transaction given the OP's statement that the main reason for buying was "with a view to profit" and the short term nature of the transaction - these are 2 of the basic tests about trading.The profit would be taxed under the Capital Gains Tax rules so you would not pay tax on the full £40,000.
First, you can offset against your share of the gain the Annual Capital Gains Tax allowance which, for this tax year (2013/14)is £10,900. You can also offset against the "gain" any costs incurred in developing the land and any costs incurred in selling the land - such as agent's fees, solicitors fees etc.
After all these deductions, what is left over is taxed at either 18% (if you are a basic rate taxpayer) or 28% if you are a higher rate tax payer.
If the gain itself elevates you from being a basic rate taxpayer into being a higher rate taxpayer, part of the gain will be taxed at 18% and the remainder will be taxed at 28%.
This means that yourself and your father will not have the same tax bill arising from the same profit made on the sale of the land because your personal tax situation will not be identical to your father's.
It may well be different if planning was in place for some houses which were to be held as long-term investments or similar, but this doesn't seem the case here.
So profit is assessed to income tax divisible equally and you may also need to prepare and file both partnership and individual tax returns.
David
Agreed - although if it is a genuine "one-off" property transaction it is doubtful if HMRC would argue that it was part of a land development trading operation. I have not seen HMRC take on cases like this with too much vigour.
However, having said that, the OP does need to be aware that development and sale of land can be seen as a "business" rather than an "investment" activity and therefore HMRC can expect that such activity be taxed under the Income Tax rules rather than Capital Gains Tax rules.
On the assumption that CGT will apply, "living" on the land would only have a marginal effect on reducing a CGT gain. Although a Main Residence is exempt from CGT, even a Main Residence will attract some CGT if the land associated with the residence exceeds a set area (half a Hectare).
Gains can be "rolled over" into a new investment. This will defer the gain until the subsequent investment is eventually sold.
However, referring back to Sumo's point. if you are planning to take on a follow up project immediately, you could be signalling to HMRC that you are actually running a property/land development business - which would be taxed under Income Tax rules, not CGT rules.
However, having said that, the OP does need to be aware that development and sale of land can be seen as a "business" rather than an "investment" activity and therefore HMRC can expect that such activity be taxed under the Income Tax rules rather than Capital Gains Tax rules.
On the assumption that CGT will apply, "living" on the land would only have a marginal effect on reducing a CGT gain. Although a Main Residence is exempt from CGT, even a Main Residence will attract some CGT if the land associated with the residence exceeds a set area (half a Hectare).
Gains can be "rolled over" into a new investment. This will defer the gain until the subsequent investment is eventually sold.
However, referring back to Sumo's point. if you are planning to take on a follow up project immediately, you could be signalling to HMRC that you are actually running a property/land development business - which would be taxed under Income Tax rules, not CGT rules.
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