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Guest The Relaxation Suite

Cgt Sleight Of Hand

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Guest The Relaxation Suite

Thisis in connection to the thread I started asking about building materials costs. I know a colleague (a former colleague to be exact) who has bought a house a couple of months ago in November, with plans to destroy a small pear orchard and build a house on it for pure profit. He is living in a house already on the land.

I was thinking about this, with regards to capital gains tax and how much he would get hit by, and it occurred to me that he could sell house 1 before house 2 is complete, thereby not paying CGT because it's his main residence, then move into house 2 and sell that and not pay any CGT on this either.

In other words he could build and sell a property and totally avoid/evade CGT.

Is this possible - I mean is this a well-known fraud in the development business, or do I just understand this process and what I have described is not possible?

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Thisis in connection to the thread I started asking about building materials costs. I know a colleague (a former colleague to be exact) who has bought a house a couple of months ago in November, with plans to destroy a small pear orchard and build a house on it for pure profit. He is living in a house already on the land.

I was thinking about this, with regards to capital gains tax and how much he would get hit by, and it occurred to me that he could sell house 1 before house 2 is complete, thereby not paying CGT because it's his main residence, then move into house 2 and sell that and not pay any CGT on this either.

In other words he could build and sell a property and totally avoid/evade CGT.

Is this possible - I mean is this a well-known fraud in the development business, or do I just understand this process and what I have described is not possible?

He is selling his principle residence and moving into another, no problem with CGT. Just don't do it several times.

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Thisis in connection to the thread I started asking about building materials costs. I know a colleague (a former colleague to be exact) who has bought a house a couple of months ago in November, with plans to destroy a small pear orchard and build a house on it for pure profit. He is living in a house already on the land.

I was thinking about this, with regards to capital gains tax and how much he would get hit by, and it occurred to me that he could sell house 1 before house 2 is complete, thereby not paying CGT because it's his main residence, then move into house 2 and sell that and not pay any CGT on this either.

In other words he could build and sell a property and totally avoid/evade CGT.

Is this possible - I mean is this a well-known fraud in the development business, or do I just understand this process and what I have described is not possible?

It's not possible because CGT is only charged on the "gain" in a property's value due to market movement.

The value created by buiding a building is not a "capital" gain.

tim

Edited by tim123

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Guest The Relaxation Suite

Thanks all for the replies - but there is a contradiction here. Tim, are you saying no one pays CGT on new build developments? But you can't build a house for 100k, sell it for 250k and simply put 150k in your pocket, so you would be liablr for income tax, in that case, and this would be at the top rate on a sum like that - am I right? Also, Sadman, if Tim is correct what was your uncle warned for?

Cheers.

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Erm CGT and PPR rules were tightened up somewhat recently. You can't really flip flop as MPs did! Its not massively tightened up but it isn't as simple as saying this is my residence this is not! Like it used to be.

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Guest The Relaxation Suite

Erm CGT and PPR rules were tightened up somewhat recently. You can't really flip flop as MPs did! Its not massively tightened up but it isn't as simple as saying this is my residence this is not! Like it used to be.

What is PPR, ken? It's funny you mention the MPs because as I was thinking about this I was thinking of their flip-flopping and the "one rule for them" thing. I can see how a person might try and get away with this (sell house 1 as main residence, keep all profit, move into house 2, sell as main residence and keep all profit) but the bottom line is this is pure tax evasion - developing property and dodging tax due on the profit of the development, whether that tax is CGT or just plain old income tax. I would be disappointed if HMRC allowed this thing to go on, when everyone else has to pay their tax up front.

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What is PPR, ken? It's funny you mention the MPs because as I was thinking about this I was thinking of their flip-flopping and the "one rule for them" thing. I can see how a person might try and get away with this (sell house 1 as main residence, keep all profit, move into house 2, sell as main residence and keep all profit) but the bottom line is this is pure tax evasion - developing property and dodging tax due on the profit of the development, whether that tax is CGT or just plain old income tax. I would be disappointed if HMRC allowed this thing to go on, when everyone else has to pay their tax up front.

PPR is principle private residence, you can also get renting relief and for Kurt who works overseas you can also get PPR if you are working overseas. In effect if you occupy a house and sell it you do not need to pay tax on it when you sell.

There are lots of things which count as PPR if you don't live there, off my head:

If you work away for up to 3 years overseas or in the UK.

If you rent it out.

You also used to get 36 months free

There are more on that list which I forget, like roll over relief renting relief, partial use of business. The tax exam question I recall was a husband + wife with a house each one of which is used for renting out, he uses part of it for business and he was away for 23 months in Africa working. It was a long question with a page long answer. I aced that exam though with 87 marks out of 100.

In the past HMRC's CGT dept never used to challenge CGT comps by accountants, today the software tends to challenge CGT comps more and more often. So even if you do them legitimately HMRC more often than in the past asks for proof.

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What is PPR, ken? It's funny you mention the MPs because as I was thinking about this I was thinking of their flip-flopping and the "one rule for them" thing. I can see how a person might try and get away with this (sell house 1 as main residence, keep all profit, move into house 2, sell as main residence and keep all profit) but the bottom line is this is pure tax evasion - developing property and dodging tax due on the profit of the development, whether that tax is CGT or just plain old income tax. I would be disappointed if HMRC allowed this thing to go on, when everyone else has to pay their tax up front.

Why should you not be allowed to sell your main residence and move to another house?

Why is it pure tax evasion that you should have to hand over a portion of the increase that inflation has caused to the price of your house?

And its not as simple and straight forward as you think. HMRC are not stupid, but they have to comply with the law. Read this tribunal decision to see how the courts are interpreting the law.

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Why should you not be allowed to sell your main residence and move to another house?

This is the traditional view.... i.e I buy a house my home I sell a house my home I don't pay CGT on inflation or increased paper value. This is perfectly fair as you imply above.

The problem is MPs engaged in something called flip flopping whereby they owned two homes, you are ONLY ALLOWED ONE HOME to be your PPR. As a married couple you can also only have ONE HOME.

MPs and many people actually had two homes and when they wanted to sell they declared the one they wanted to sell as the PPR thus dodging tax on the profits they made on the second house. They then re-elected the original home their PPR and thus artifically avoided tax on the profits.

The 36 month rule meant that you could save swaths of CGT even if you only lived there on paper for 1 month. Since MPs were 40% tax payers anyway they saved 40% tax on all of the profits they made.

MPs got a bad rep for it (even if it goes on) because they used this along with getting the tax payer to pay for the capital element of the houses when flipping their PPR. Which is why it is not cricket. Long standing MPs have done this many many times dodging millions (each) in taxes.

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MPs and many people actually had two homes and when they wanted to sell they declared the one they wanted to sell as the PPR thus dodging tax on the profits they made on the second house. They then re-elected the original home their PPR and thus artifically avoided tax on the profits.

The 36 month rule meant that you could save swaths of CGT even if you only lived there on paper for 1 month. Since MPs were 40% tax payers anyway they saved 40% tax on all of the profits they made.

Yes, you could actually have a main residence without ever occupying it at all. The legislation was amended during the late 80's/early 90's recession. You were allowed a concessionary period of up to 12 months, in exceptional circumstances 24 months, to extend the exemption for CGT if you were unable to sell your house and had two houses that qualified as main residences.

The link to the tribunal appeal I posted shows how careful you have to be to prove that you had an expectation of reasonable continuity of occupation.

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Guest The Relaxation Suite

Why should you not be allowed to sell your main residence and move to another house?

Why is it pure tax evasion that you should have to hand over a portion of the increase that inflation has caused to the price of your house?

And its not as simple and straight forward as you think. HMRC are not stupid, but they have to comply with the law. Read this tribunal decision to see how the courts are interpreting the law.

If you own one home and sell it, I agree, of course. If you own one home, build an investment property next to it, sell the first home as a main residence, dodge CGT, and them move into the investment property, sell it and dodge CGT you are evading paying tax on it. It was not your main residence, it was an investment development. The law must be clear on this. You could stop it over night by legislating that one must occupy a property as a main residence for five years or it's CGT time. So then our man could move into his investment property but he owuld have to live there for five years or he pays CGT on it.

Thanks for the link by the way.

Edited by Tecumseh

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Worse still is Stamp Duty avoidance on purchasing a house

So you're rich. You buy a £2m house to live in.

Form a £2 company. Company buys house. Day of completion company closed down.

All legal.

a)You need the money - no mortgage

B) A "solicitor" who wll charge you CASH a percentage of the stamp duty "saved"

I know loads of people who have done this. The retired former conveyancing solicitor is at this moment on a diving holiday.

GHow can you tell if no stamp duty has been paid? Go to any website showing properties recently transacted in your neighbourhood. The properties sold which do not apear on the land registry have paid no stamp duty.

In my patch in the past 5 years there are 5 houses I know of which have had no stamp duty paid. Approx cost of avoidance to HMRC about £500,000

Next.

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Guest The Relaxation Suite

Worse still is Stamp Duty avoidance on purchasing a house

So you're rich. You buy a £2m house to live in.

Form a £2 company. Company buys house. Day of completion company closed down.

All legal.

a)You need the money - no mortgage

B) A "solicitor" who wll charge you CASH a percentage of the stamp duty "saved"

I know loads of people who have done this. The retired former conveyancing solicitor is at this moment on a diving holiday.

GHow can you tell if no stamp duty has been paid? Go to any website showing properties recently transacted in your neighbourhood. The properties sold which do not apear on the land registry have paid no stamp duty.

In my patch in the past 5 years there are 5 houses I know of which have had no stamp duty paid. Approx cost of avoidance to HMRC about £500,000

Next.

Nice one - interesting this one benefits purely the rich because from what you say it looks like if you have a mortgage you can't get away with it. This links up to the Wikileaks story coming out about "high-profile" Swiss bank clients etc - we all know none of the rich pay any form of taxation and they can't let the cat out the bag or there will be increasing civil unrest.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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