Keep hold of the paperwork when renovating property to let

IT is reasonably well known that if you sell your main home any gain that you make is tax-free.

But if you have a buy-to-let property, or if you have a second home or a holiday cottage, then you could well have a tax liability on sale.

The tax we are talking about is Capital Gains Tax, or CGT.

If you make a business out of buying and selling houses then you will have to pay income tax on the profits, but if you buy a property as an investment, or as a second home or holiday home, then CGT is the tax to focus on.

So how do you work out the gain on which you have to pay CGT? The answer is that you take the total sale proceeds and then deduct a list of costs including: Legal costs of sale; Advertising the property for sale;

The original cost of the property including stamp duty land tax and legal costs you incurred on purchase; plus, importantly any costs of extending or otherwise improving the property.

The last item on the list can be tricky to apply in practice. For one thing, you can deduct improvements only if the work you paid for is still reflected in the state of the property when you sell it.

So, in a worst-case scenario, if you have had a conservatory built onto the holiday cottage but then have the conservatory knocked down before sale, the cost of the conservatory won’t be allowable in working out the taxable gain. Secondly, you will need to distinguish between repair and maintenance costs on the one hand, and improvements on the other.

With a buy-to-let property, you can deduct repair and maintenance costs against the rental income in working out the annual income tax.

But such costs can’t be deducted in working out the CGT on sale. And if it’s a holiday cottage that you use yourself and don’t rent out, then you don’t get any tax relief for repair and maintenance costs at all. Repair and maintenance includes redecoration, but can cover some quite extensive renovations if you are just putting the property back into the state of “good repair” that it was in when you bought it.

Also, you won’t be able to make a claim for improvements with any degree of confidence unless you keep evidence to back up the claim.

This was brought out in a Tax Tribunal case earlier this year, where a property owner failed in his claim to deduct well over £100,000 that he believed he had spent on improvements to two properties that he had sold.

The taxpayer had kept a separate bank account for his property investments, and he was able to show large amounts being paid out of that account, but as he couldn’t produce invoices, or paid cheques, the Tribunal had no option but to refuse his claims for these costs.

It’s important as well to note that there is in effect no time limit on how long you need to keep these records for.

You will probably only need them if HMRC enquires into your tax return, but if they ask to see invoices you will need to produce the evidence of costs incurred right back to the date you bought the property.

So if you do invest in properties other than your main home, make sure you keep evidence of any improvement costs that you may wish to claim for when you sell.

If you don’t have the evidence, it could prove to be expensive!