Taxation on a self build

I have been fortunate to have bought a house (my PPR for over 5 years)on a good sized site. I decided in 2006 that I would knock down my PPR and rebuild two houses one of which would be my new PPR and the other I would sell to hopefully reduce/eliminate the mortgage for the new builds. I contracted a builder to build the houses and contracted other tradesmen for the electricity, plumbing etc. I am a PAYE worker but am project managing the build. Both houses are near completion and I am now hearing conflicting stories of my liability to tax. I have suffered all VAT on the build and so I had thought that the only tax I would be liable to in selling on house no2 would be CGT. I am now hearing that I may be caught for VAT on the sale of the new house, some sort of construction tax called RCT and that I will not be liable to CGT but will be liable to income tax at my top rate of 41%. Can anyone please shed some light on what the position is? I am now worried that the stress my family and I took on in securing a large mortgage, renting another property with the view to be mortgage free is all in vain and that the tax man is going to penalise me to the hilt. Any advice would be welcome.

I am now hearing that I may be caught for VAT on the sale of the new house

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The supply/sale of new property in the course or furtherence of business is liable to VAT at 13.5% The threshold for this is nil. Suggest you register yourself for VAT asap. I do not think that you can recoup the VAT expendititure to date-back dating not allowed.

I will not be liable to CGT but will be liable to income tax at my top rate of 41%.

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Correct. CGT is not relevant to income from trading activity. It is is income tax.

construction tax called RCT

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I have heard it mentioned before.

On a positive note you will only pay it on any profit you make. By the sounds of it you did not get tax advice before commencement of the project. You need to speak an accountant-urgently.

Thanks Luternau, re the VAT issue, will this apply to me given that this is a one off house build and not my normal line of work? I am still a PAYE worker.

The income tax is effectively killing my chances of being mortgage free, how can I avoid it or reduce the taxable earning? Could I rent out the house I want to sell for a year (pay income tax on that) and then sell as an investment property giving rise to a CGT hit rather than income tax or perhaps move into the house I want to sell for say a year, leave the other house unoccupied and then sell up and move into the unoccupied house. Would this be avoidance or evasion?

You have to return 13.5% of the sale price of new property-however VAT is not payable on second hand property. If you sell to your self-this couls be regarded as self supply and leave you exposed to paying the VAT in addition to the stamp duty if it was not your principle residence (investment). There is a fine line between avoidance and evasion. A chat with the Revenue would be worth while-they are very fair and only come down hard on those that try to evade.
Income tax is only payable on the profit you make on the sale. The taxable amount would also be the sale price minus 13.5% vat. You should also be able to deduct interest on money borrowed-in proportion to the part of the site that applies to the sale property, construction costs, material costs (including the VAT amounts-which you are not reclaiming.
The best advice I can give you is not to go any further without getting proper advice that is specific to your situation. i dont know if you got wrong advice form other people that have sone the same or if it just looked a good thing on paper and you just went ahead.
It was by the way a good idea to do what you did-and I dont think it will be all doom and gloom ahead. Whether its turns out to be worth all the trouble and inconvience remains to be seen. Good luck.