When it comes to taxes, and capital gains tax, in particular, it is no wonder many people look for ways to reduce or avoid paying taxes legally. The rules regarding tax payments after selling property are complex, and speaking with an expert is always worthwhile, especially when it comes to flipping houses.
One curious thing about flipping houses, at least in the UK housing market and tax environment, is that there are two different meanings. You must know the two UK meanings of flipping houses, especially if you wish to avoid paying capital gains tax. This blog talks you through the two definitions and provides tips and guidance on managing CGT payments with property sales.
Table of Contents
What is property flipping?
Property flipping is a well-known activity worldwide often referred to as real estate investing by other countries, and many people, landlords and even businesses engage in property flipping to generate profits. The buyer purchases the property, adds value to the home, and then sells the property at a higher price than they paid.
The aim is to generate profit, even after the property investment cost is considered.
Property flipping is often lucrative, but this activity is an associated risk. There is no guarantee you can buy a home and then sell it for a higher price. Anyone engaging in property flipping should know the market well, seek assistance from specialists, and commit to the project and process as much as possible.
Is there another definition of flipping for property in the UK?
While flipping is commonly used worldwide to describe someone buying a home, improving its value, and then selling the property, there is another use of property flipping.
This term relates to how HMRC differentiates between a main residence and a second residence regarding capital gains tax. This term is extremely useful for people looking to avoid capital gains tax on a property sale.
If a person sells their primary residence, the sale is exempt from capital gains tax. However, if you sell an additional property, you pay CGT. Just like capital gains tax on stocks – it depends.
In this case, flipping describes the act of someone naming a previously recognised second residence as their main residence before they are due to sell it. If you hope to get around paying capital gains tax by flipping your residencies, there are some things you need to know.
Is property flipping legal?
Yes, property flipping is legal. Some people might not agree with the activity, especially people unable to get on the property ladder themselves, but flipping is a common activity for residential property, and even commercial property. There are other challenges and tax issues to consider when flipping commercial property, but it is an option to consider.
Should I speak with an estate agent?
It is always advisable to discuss your plans with specialists, and of course, estate agents are trusted sources when it comes to property purchases. If you have queries about stamp duty, house prices, whether you need a bridging loan and the best steps for house flipping, please arrange an appointment with estate agents.
Get advice on property matters, bridging loans, stamp duty and house sales
Also, if you plan to buy a run down property to flip property for profit, an agent will advise you on the best steps. Professional advice will run through the costs involved, including other fees such as agent charges, costs of a bridging loan or home improvements, hopefully helping you enjoy a quick profit.
An agent helps you find the target market looking for a main residence second property
In the right market, it is possible to buy a property and with prices rising rapidly, sell it for an attractive profit. The property market creates fantastic opportunities for a quick sale, even with a fixer upper property. The price of homes sold in the UK has risen sharply in recent
However, when it comes to house flipping for tax relief or selling a main home for profit, always speak with a trusted source to find the right price.
How is profit determined with property flipping?
Calculating profit from property flipping is similar to determining the profit of any project.
The sale price – (the purchase price + cost of work) = The gross profit.
Anyone operating as a limited company and flipping property will have to set aside funds to pay corporation tax. Anyone acting as an individual should note that HMRC doesn’t view property flipping as an investment activity, so there is no capital gains tax associated with this move.
Of course, capital gains tax is applicable on second (or more) properties, so if an individual owns a property and then buys another to flip, they’ll likely need to pay capital gains tax on this additional property.
When do you pay capital gains tax ?
According to the Government website, individuals pay CGT on property within 60 days, so the capital gains tax bill is due relatively quickly after a property is sold in this manner.
When do you pay income tax on CGT matters?
Other CGT payments are payable as part of an income tax return, so it is vital to know there is a difference in CGT payments for property sales. These sales should be included in an income tax return, due the January after the end of the financial year the sale was made.
If you are in doubt or confused as to the capital gains tax payments due or when you must pay capital gains tax, please speak with a qualified accountant or financial expert. When completing your taxes, it’s helpful to know your tax rate, as the impact of being a higher rate taxpayer compared to basic rate taxpayers can influence your decision.
Given the complexity of capital gains tax matters, the sums of money involved, and the penalties for submitting incorrect records, it is crucial to make an informed decision. Arranging an appointment with a CGT specialist or hiring an accountant to manage your capital gains tax records is a sensible move.
Avoiding capital gains tax?
If you are looking to avoid capital gains tax, and who doesn’t want to not pay income tax or find a tax free allowance, you need to speak with experts. If you flip property, avoiding capital gains tax is possible, but you must ensure you complete tax returns correctly. Hiring a qualified accountant or tax specialist will cut costs, save money and give you confidence.