Does Flipping Houses Avoid Capital Gains Tax in the UK?

If you have a good eye for spotting properties at a bargain price that you can later sell for a profit (known as flipping), it may sound like an attractive option.

But nobody wants to end up with a huge tax bill. As a result, you’re now wondering whether flipping houses in the UK can avoid capital gains tax?

We start by asking the basic question but also cover everything you need to know about house flipping and capital gains tax, possible ways to reduce how much tax you pay as well as the pros and cons of house flipping.

Can Flipping (Buy to Selling) Properties Escape Capital Gains Tax in UK?

Many people believe flipping houses is a way to avoid capital gains tax. However, the rules are a little more complex.

In the UK, HMRC imposes CGT on people who buy and sell properties that aren’t their home.

To be classed as a “home,” a property must meet the following criteria:

You only have one, and it has been your main residence since you bought it
You haven’t let the house out
You haven’t used the property exclusively for business purposes (e.g., an office)
The house is less than 5,000 square meters
You didn’t buy the house just to make a profit

This exemption from CGT is known as private residence relief. Naturally, if you let out a BTL or rental property to tenants, it wouldn’t meet this criteria.

It’s therefore possible to avoid capital gains tax by declaring the property you’re flipping as your main residence.

What is Flipping?

Flipping houses is generally defined as purchasing a property, renovating it and selling it for a higher price.

However, there are a couple of slightly different definitions. Some people use the term “flipping” specifically for main residence flipping, which means making a property your main residence so you can sell it in the future.

Others use it to describe buying and selling a house without living there or carrying out any renovations, adopting a “buy-low-sell-high” approach.

This article will stick to the more general definition of flipping — but as you’ll soon see, the approach you take may influence whether you need to pay capital gains tax.

What is Capital Gains Tax on Property Flips?

Capital Gains Tax (CGT) is a tax you pay on the profit you earn from an investment. Note that this is the difference between the price you paid to buy an asset and the price you sell it at — not the total profit.

For example, if you buy a property for £100,000 and sell it for £200,000, £100,000 would be subject to CGT.

However if, like in the example below, you spend £50,000 on improving the property, these costs can be offset against your tax. Therefore, the profit of £50,000 would be subject to CGT.

In the UK, there’s a tax allowance, meaning you only need to pay CGT on the profit you make above this amount. This changes every year.

Above this, CGT rates vary depending on whether you’re a basic or higher rate taxpayer.

Higher rate taxpayers pay the highest percentage.

Basic rate taxpayers need to add any gains from their investment profits to their taxable income, which can push them into the higher bracket. However, if you’re still in the basic tax band after accounting for this, you’ll pay a lower CGT rate.

Again, the exact rates vary every tax year.

Common Confusion Over Property Flipping

Capital gains tax in the UK used to work somewhat differently, with more tax incentives for property flipping. This has partly fueled the myths about avoiding CGT.

The UK government previously offered a “final period exemption” of 18 months, during which you could move out of a home you were selling while still claiming principal private residence relief.

In April 2020, the government reduced the final period exemption to nine months.

There’s another complication. As you may have noticed, one of the criteria for CGT exemption is that you can’t buy and sell a house solely to earn a profit. This means that anyone who moves into a property solely to sell it for a higher price isn’t eligible for tax relief, even if it’s their only property or main residence.

Examples of House Flips

To help you get your head around when exactly CGT does and doesn’t apply, let’s run through some examples.

If you buy a property to renovate it and sell it later while living elsewhere, you will always have to pay CGT on your profits.

On the other hand, if you move into a property while you’re carrying renovations, you may be eligible for primary residence relief.

However, a word of caution. If you continually do this, you may attract suspicion from HMRC, and they could consider your property flipping to be “trading.” This would carry tax implications, and they may expect you to do a self-assessment tax return on your property earnings and pay income tax.

Some people opt to trade as a limited company instead. In this case, you would pay corporation tax on your profits on the property sale (you can check the current rates on the HMRC website).

This makes sense for people who are established in the investment property business with high yearly profits.

Finally, if you rent a property to tenants, you’ll automatically be subject to CGT if you sell the property.

Legal Ways to Minimise Capital Gains Tax

HMRC has actively tried to close tax loopholes, so there’s no magic way you can flip properties while avoiding all taxes, especially if you’re already earning enough to pay income tax.

Besides, it’s always better to seek out professional advice from a tax expert about the potential tax implications of different options.

However, we’ve listed a few popular ways to reduce your tax burden below.

Primary Residence Declaration

If you own a second property or multiple properties, you can potentially lower your tax burden by carefully considering which house you declare as your main residence. For instance, you declare a house as your main home if you’re planning on selling it first.

Tax-Free Allowance

Another option is to use your tax-free allowance, as discussed earlier. If you own a property with a partner or someone else, you can combine your allowances, resulting in more savings.

Expenses to Offset CGT

You can also deduct expenses from your tax burden. Potential deductions include stamp duty, estate agent fees, and the cost of a solicitor.

Losses you’ve made on other investments are further potential deductions (e.g., holding a stock that has declined in value)

Cash Sales

Finally, you can sometimes avoid paying CGT by selling to a cash buyer for below market value. Typically, buyers get about 80% of market value when selling to a cash buyer.

However, there are other factors to consider — going down this route can eat into the profits of a house flip and mean it’s no longer worth it.

Is Flipping Houses Right For You?

Knowing that you likely can’t avoid CGT when house flipping may swing the balance for you. However, we’ll briefly review the other pros and cons of flipping houses.

Pros of Flipping Houses

Many people are drawn to flipping houses because it’s a short-term project. Instead of needing to rent out a buy to let property to tenants for years to make good profit, property flippers can buy and sell a place in a short period.

It can also result in a high return on investment if you’re good at what you do, and it’s often less work than a more substantial development project.

Cons of Flipping Houses

However, carrying out renovations can be expensive. Although property flippers generally don’t carry out extensive renovations, beginners may not realise there’s still a fair amount of work involved.

There’s also a risk that you won’t be able to make as much of a profit as you expected.

Plus, there are various costs involved in buying a house. These include other taxes (like stamp duty), legal (conveyancing) fees and finance charges.

To Flip or Not to Flip?

Whether you ultimately decide to pursue house flipping is up to you, but don’t get caught up by the promises of social media that house flipping is a magical solution to avoid capital gains tax. You’re unlikely to be able to property flip consistently without attracting attention from HMRC.

If you’re interested in making a cash sale to reduce your capital gains tax from flipping, you may be interested in working with Property Solvers. We’re available 24/7 to discuss your options with you and help you make the right decision.