Tax Implications of Selling a Property Owned With a Friend

Introduction to the tax implications of selling an investment property

Buying a property in the UK can be a significant financial endeavour, and many individuals are exploring co-ownership options, such as purchasing property with a friend. While this arrangement can offer several benefits, it also comes with its own set of tax and legal implications that both parties should consider carefully. Over two articles, we aim to delve into the key factors to be aware of when both purchasing & maintaining a property with a friend and the implications when it comes time to eventually sell the property.

tax implications of Capital Gains Tax (CGT)

When you sell an investment property, you may be liable for CGT. The amount of CGT owed will depend on the property’s value increase since purchase, the ownership structure and if the property was occupied as a main residence for the period of ownership. Should a property be occupied by the owners for part of, or the entire period of ownership, they may be eligible to claim Principle Private Residence relief, as explained below.

tax implications of Principle Private Residence (PPR) Relief

Principal Private Residence (PPR) relief is available to individuals when they sell the property, they consider their primary home. In terms of Capital Gains Tax (CGT), the concept of a “main residence” pertains to the dwelling where an individual lives and regards as their main abode. To qualify, this property must be the primary place of residence where the taxpayer resides and carries out their daily activities.

Although some minor business use or renting out a part of the property is permissible, its primary use should not be for business or investment purposes. Additionally, for a property to be recognised as a main residence, there needs to be a continuous period of occupancy. If the property remains vacant for prolonged periods or is frequently rented out, this could affect its eligibility as a main residence.

When considering whether a property qualifies as a main residence, HMRC will consider things such:

Electoral register,
Doctors’ surgery,
Dentist,
Car registration,
Insurance,
Utilities

There is a significant body of case law on this area which have broadly concluded that it is the quality rather than duration of occupation which will determine whether or not a property can qualify.

The relief is calculated with reference to periods of actual occupancy and other periods of deemed occupancy. The final nine months of ownership always count as deemed occupancy if the property has been lived in as your main residence at some point in the period of ownership. Other periods of deemed occupancy require reoccupation after the period of vacancy, and periods where the property has been let out are not qualifying period of occupancy. You may only elect one property as your main residence at any given time.

Capital vs Revenue Expenditure

Some individuals may seek to purchase a dilapidated property with the intention of renovating. Whilst this may be a more affordable way to achieve a more customised property. Should the individual then rent out the property upon completion of the renovation, it is important to understand when you are eligible to claim these costs for the purposes of tax.

Revenue expenses, also known as operating expenses, are the costs incurred in the day-to-day operation of an asset. These costs include such expenses as repairs, insurance and service charges. As these costs are incurred in relation to the continuing generation of income from an asset, they are not considered to add to the value of an asset are thus not an eligible expense that can be used to reduce any potential gain subject to Capital Gains Tax.

Capital expenses are costs incurred in order to acquire, improve or enhance a capital asset, such as a property. As these costs are incurred while adding to the value of an asset, when selling an asset these costs are used to reduce any potential gain that may be subject to CGT. Capital treatment may also be applied to any “repair” costs incurred prior to the first occasion of letting as it is generally considered these costs have been incurred to bring the property into a state in which it can be let.

Capital expenses may be incurred throughout the whole period of ownership of the property. If the individuals/company wish to claim capital expenses while calculating their gain subject to CGT, it is vital that all supporting documentation is retained. This includes the completion statements, invoices and receipts.

Badges of Trade

Income tax is charged on “the profits of a trade, profession or vocation”. As a “trade” is not fully defined in the legislation, the interpretation of what is meant by the term “trade” has been left largely to the Courts. The Courts have developed a number of tests to determine whether somebody is trading. These tests are known as the “badges of trade”.

HMRC often looks closely at the purchase and sale of land and buildings for these badges of trade, in order to determine if an individual has traded and thus if there is any income taxes or capital gains tax that may be due. One of the badges relates to systematic and repeating transactions, however when it comes to land/property there simply needs to be a profit seeking motive (another badge) and HMRC may determine that the “transactions in UK land” anti-avoidance provisions apply and apply income tax to the gain.

If HMRC believe that you may have not reported income, they will send a letter stating that they “have information which indicates you have undeclared income” and ask that you consider you tax position (known as a nudge letter).

What to do in the event that one party wish to sell and the other does not

The first step in addressing this situation is open and honest communication. Try to have a calm and respectful conversation with your co-owner about your reasons for wanting to sell the property. Listen to their concerns as well. Sometimes, misunderstandings or miscommunications can be resolved through dialogue.

If you and your friend have a written co-ownership agreement, review it carefully. This agreement should outline the rights and responsibilities of each co-owner, including procedures for selling the property. If there are specific conditions or a buyout clause, it’s essential to understand them.

If communication fails to resolve the issue, consider seeking mediation. A professional mediator can help facilitate discussions between you and your co-owner, assisting in finding a compromise or a mutually agreeable solution. Mediation can be a less costly and time-consuming alternative to legal action.

If all else fails, you may need to consider legal action. This typically involves filing a partition action in court. A partition action can force the sale of the property, allowing you to divide the proceeds according to your co-ownership agreement or the court’s decision.

Should you wish to sell and your co-owner does not, another option is to propose they buy you out of your share in the property. This may involve negotiating a fair price for their portion, which can be achieved through appraisals and legal documentation. Keep in mind that this option requires sufficient financial resources on your part.

If your co-owner remains unwilling to sell, you can consider selling your share of the property. This can be done by finding a willing buyer for your portion. However, it may be more challenging to find a buyer for a partial ownership share.

Conclusion

Purchasing a property with a friend in the UK can be a viable option to enter the property market whilst sharing expenses. However, when selling a property, it’s crucial to navigate the tax and legal implications diligently. Seek legal and financial advice and stay informed about changing tax laws and regulations to ensure a smooth and mutually beneficial property ownership experience.

Confused about the tax implications of selling an investment property and want to make sure you get it right? At Edge Tax, our team of experienced professionals is here to help you through every step of the business process. Edge Tax stands as your trusted ally for all your tax needs, we provide tailored advice and support, removing tax planning and compliance stress.

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