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sir i wanted to know why the house renovation cost of 50600 is deducted during the calculation of taxable income as it is clearly mention in the question that the house was derelict?? isn’t the cost incurred to bring the house in usable disalloble??
On 25 April 2014 Simon, born in 1980. purchased a derelict freehold house for £127,000. Legal fees of £1,800 were paid In respect of the purchase.
Simon then renovated the house at a cost of £50,600, with the renovation being completed on 5 August 2014. He immediately put the house up for sale, and it was sold on 26 August 2014 for £260,000. Legal fees of £2,600 were paid in respect of the sale.
Simon financed the transaction by a bank loan of £150,000 that was taken out on 26 april 2014 at an annual interest rate of 6%. The bank loan was repaid on 25 August 2014.
Simon had no other income or capital gains for the tax year 2014/15 except as indicated above.
Simon has been advised that whether or not he ls treated as carrying on a trade will be determined according to the six following ‘badges of trade’:
(1) Subject matter of the transaction
(2) Length of ownership
(3) Frequency of similar transactions(4) Work done on the property
(5) Circumstances responsible for the realisation
(6) Motive Required(a) Briefly explain the meaning of each of the six ‘badges of trade’ listed In the question.
Note: you are not expected to quote from decided cases. (3 marks)
(b) Calculate Simon’s income tax liability and his Class 2 and Class 4 national insurance contributions for the tax year 2014/15, if he is treated as carrying on a trade in respect of the disposal of the freehold house.
(c) Calculate Simon’s capital gains tax liability for the tax year 2014/15, if he is not treated as carrying on a trade in respect of the disposal of the freehold house. (4 marks)
This would be viewed as a trading transaction hence the discussion required of the badges of trade therefore all costs incurred on the property renovation are allowable trading expenses in working the profit that arose – it is not a capital cost as the entire venture is trading.
Sir, in this question, will the class 2 NIC be calculated for the period of self employment or for the whole year?
The answer says 19 weeks. But the text does not mention that Class 2 NIC is payable for the period of self employment.
Even if we take the period of self employment, its 4 months which equals to 17.33 weeks.
It is payable for the weeks in which the taxpayer has traded and as long as a reasonable calculation was done you would score the marks
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