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It's easy to pay too much tax when selling a property because the distinction of whether you are a landlord or a developer is not always clear.
Knowing which side of the fence individual property people are on is important, as the tax treatment of profits varies widely, and it's possible to be in both camps at the same time.
Landlords are property investors. Rents are taxed as income, and gains are treated as capital gains tax (CGT).
Developers are traders. Gains in selling properties are taxed as income.
HMRC will try to show a property person is a landlord or investor because the tax take is higher.
Income tax rates are 20/40/45 per cent, while CGT rates are 18/28 per cent.
To make the distinction, HMRC has a tick-sheet to assess a property transaction.
Intention to trade
Most developers signal they are traders as they intend to sell a home as quickly as they can after buying and refurbishing. Evidence of intending to sell would include asking an estate agent for a valuation.
Intention to let
Evidence of buying-to-let includes asking a letting agent for a rent estimate and advertising to find tenants.
Financing
This is often a key indicator. Investors tend to commit to long-term financing deals, while developers often deal in cash or short-term funding, such as bridging loans.
Timing
Traders are likely to regularly buy and sell homes within a few months, while investors can hold properties on their books for decades.
Inherited properties
Many letting properties are inherited and sold quickly. Generally, HMRC will agree that these are not trades.
Property people may be investors and developers at the same time if they own investment property and decide to buy another home to flip.
It's important to remember HMRC decides if you are a landlord or investor - the choice is not left to the taxpayer.
Property people most likely to fall foul of tax rules are serial developers - that's builders who regularly move home, refurbish the property and then move on to another property. The builder will claim private residence relief means no tax is due, but HMRC rarely falls for the excuse and grabs a slice of the profits.
More detailed information on the tax implications of letting homes is provided in the HMRC Property Income Manual (PIM).
PIM is HMRC's interpretation of tax rules for landlords. The contents are guidance for tax inspectors and not the letter of the law.
HMRC's Business Income Manual (BIM) explains tax rules for developers.
HMRC also publishes toolkits for property people to help ensure tax returns are completed correctly, listing the most common mistakes taxpayers make when filing their returns.
The toolkit topics include: