Flipping Great Profits for Home Doer Uppers

Property professionals have turned their hand to flipping homes for profit during the coronavirus lockdown, with a sharp rise in the number of refurbished houses hitting the market. 

Flipping is buying, renovating and selling a home in a short time. Data published in November 2020 shows 23,000 homes were flipped in England and Wales over the past 12 months for an average pre-tax profit of £40,995 - a record high. But property trading is not always that simple – especially when the tax man comes after a slice of the profits.

Flipping homes – the figures

Trading homes is always popular when house prices are rising fast. Speculating on the property market started in the 80s but stalled around 2008 when the financial crash saw the bottom fall out of the housing market. 

Since then, the art of flipping has gradually recovered, encouraged by the popular BBC TV series Homes Under the Hammer and a resurgence in house prices.

According to research by property firm Hamptons International, 2.5% of all property sales this year involve flipping, reaching 23,000 transactions. The average £40,995 profit is 26% of the purchase price after renovation, buying and selling costs but before tax. Most flipped homes are houses – a big move in the market since 2019. 

Last year, one in five flipped homes were flats – this year, that’s dropped to 5% or one in 20. Profits in 2019 averaged £29,685. Flippers have spent £4.4 billion on their projects, raking £5.1 billion in sales.

Flipping homes – Northern delights

Despite a few blips in the market, the north is the flipping hotspot of England and Wales, and Burnley has held the crown since 2015. The cheapest terraced house going to auction is valued at £10,000 – but dozens more are listed on the property portal Rightmove for £50,000 or less.

“Burnley has cemented itself in the top spot for the last six years as it’s one of the few places where investors can purchase a home without paying any stamp duty,” said Aneisha Beveridge, head of research at Hamptons International. 

“8.2% of all homes sold in the town during 2020 so far had been flipped within the preceding 12 months.  81% of the homes flipped in Burnley this year were bought for £40,000 or less, with buyers not liable to pay either general or investor stamp duty.  93% of these purchases were terraced houses, bought for an average price of £38,000.”

Flipping homes – the tax

A common myth is property traders pay capital gains tax. It’s not true; they pay income tax as individuals or partners or corporation tax if a company does the renovation. Beware the pitfall of claiming the flipped home as the primary residence to avoid CGT. 

Most flipped properties are in dire condition, and many are unmortgageable because they do not have a kitchen or bathroom. This also makes them uninhabitable as a primary home. The best way for many traders to minimise tax on profits is to buy, do up and sell through a company for several reasons:

• Companies pay tax on profits at a lower rate than individuals
• Income shifting to minimise income tax is easy. Instead of filing a Form 17 with HMRC and paying a lawyer for a declaration of trust each time you adjust ownership shares, companies can reallocate shareholdings.
• Companies are like batteries storing money with a flow you can switch on or off to manipulate the tax you pay each year. Instead of drawing dividends, cash can be left in a company and withdrawn when shareholders want to keep their annual tax bills down.

How property flipping profits are taxed

The profits from selling a flipped property are added to company profits and taxed in the same way as any other corporate income. 

Think of tax on property profits as a filling station with different pumps filling up your tax liability. Only one pump fills your corporation tax liability, like diesel, but your tax liability is fuelled by leaded and unleaded – representing income and capital gains taxes. All income funnelled into the diesel tank has the buying, renovation and selling costs removed to leave a gross profit. Any reliefs you are entitled to are deducted to leave a taxable amount. 

Once the tax is paid, any money in the company bank account can be paid to directors as a dividend. Dividends are paid as an amount per share, so you can allocate which shareholder gets what by the number of shares they are issued. But shareholders can waive payments in a year when they are paying income tax at a higher rate to withdraw them in a year when their tax is lower.

Flipping property FAQ

Flipping property is back in fashion for profit conscious developers, according to new research. But many property people are confused about the tax they pay on flipping profits.

Why don’t I pay capital gains tax on flipping?

Because CGT applies to investments, not trading profits, and tax law views flipping a property as a business for a developer and not an investment for a landlord. Income tax is applied to individual trading profits or corporation tax for a company.

Can I rent out a flipped property if I can’t sell?

Yes. Renting out a property bought with the intention of flipping is OK for the short term, for instance, to wait for the market to recover after a price drop, but it is not a long-term tax strategy to avoid personal taxes charged at a higher rate.

My estate agent says don’t over refurb; what do they mean?

Every neighbourhood has a price cap, and refurbishing a house beyond that ceiling means a property is too expensive to sell. The estate agent tells you to do the property up to what buyers expect in that neighbourhood without going too high-end because the spending will not be reflected in the profits.

How do I find a property to flip?

Many homes for flipping are sold at auction because homeowners are unwilling to take on the work to bring them up to scratch. 

But do follow the golden auction buying rules –

• View the property before buying so you know what you are in for
• Read the legal pack
• Take professional advice about the cost and remedy for any structural problems.
• Arrange your finances and do your sums before the auction

What are the tax rate comparisons for individuals and companies?

Once a dividend is drawn, taxpayers have a £2,000 tax-free allowance and then pay income tax on the amount at 7.5% at the basic rate or 32.5% at a higher rate than 38.1% at the additional rate.