Some people regularly purchase run-down houses, do them up and sell  them on. If you do this as part of your building/property development  business, the profits made on the sale of the properties may be taxed  as trading income (tax rates: 20%, 40% or 50%).

If you let the renovated properties, then sell them at a later date,  the profits made on those sales will be taxed as capital gains  (tax rates: 18% or 28%). The position is less clear cut if  you live in each property for a period either during or after the  renovations are undertaken. The Taxman is keen to charge any profits  made on the renovated property as trading income, because if the  profits are categorised as a capital gain, that gain may well be  exempt from tax on the basis that the property was your main  residence.

For the Taxman to prove the money made from the property is trading  income he must show the owner’s motive for purchasing and renovating  the property was to make a profit, and not simply to make the property  more comfortable for the owner to reside in. This is difficult to prove.

If the owner is a builder by trade the Taxman may also argue that the  property renovation was undertaken as part of his building business,  even if he also lived in the property. The Taxman may say the profits  should be taxed as a trade if the owner has a history of purchasing  and renovating many properties and living in each for only a short  period.

If you want to avoid profits you make on renovating and selling a  property being taxed as a trade, make sure you make the property your  real home for a significant period. Have a good reason for living in  that location, eg locality to schools or work, and try not to make a habit of purchasing and renovating several properties within a short number of years.