Keep hold of the pa­per­work when ren­o­vat­ing prop­erty to let

Yorkshire Post - Property - - PROPERTY - Adrian Wid­dow­son

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!

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