Tax Factor

05 August 2010

Property development in the current economic climate

Today’s market creates challenges and opportunities for all businesses and this article focuses upon issues relevant to property developers.

There are a number of issues which property developers need to consider with a view to minimising tax liabilities. These include:

Business structure

• Consider owning property personally at first rather than through a company.  The rules for taxing profits can mean that minimal amounts of profit fall to be taxed in the early years of a business or losses may arise which can then be set against the income of previous years when tax may have been paid at higher rates.

• If the business is profitable then it is likely to be advantageous to incorporate. At this point values should be obtained for both development properties and other assets. If property is transferred into a corporate entity before it has increased significantly in value then personal profits can be kept to a minimum and advantage taken of the 21% corporation tax rate. Although there will have been a disposal of assets there are specific reliefs available to prevent any capital gain being taxed on incorporation of an existing business.

• A corporate entity is likely to be the best structure going forward, having the advantage of limited liability protection and lower tax rates on the profits made.

• Losses made by companies for periods ending between 24 November 2008 and 23 November 2010 can now be carried back against profits of the preceding 3 years subject to maximum claims of £50,000 each for year 2 and 3.  Consider how to maximise these claims by reviewing work in progress values, bad debts and repair provisions. 

• Remember that it is possible to make a provisional loss claim once it is known that losses will be made even though the accounts may not have been finalised.

• Within a group of companies it is often advantageous to use a specific company to carry out one or several property developments.  This gives the flexibility to sell a profitable company and provided a trading group satisfies certain criteria the group may be able to do this without paying any capital gains tax.

Property development / property investment

What happens when you cannot sell your property? 

• Where properties are let out rather than sold on consider if they should be reclassified as investment properties.  If costs have been high and are now close to or exceed the market value of the property, losses could arise in the business which can be set off elsewhere.

• Letting properties can create VAT issues for property developers (see note below).   Transferring let property to a property investment company could be crucial for VAT but there may be other reasons for establishing separate property development and property investment companies.   For example, for capital gains tax purposes neither Entrepreneur’s Relief (for individual shareholders) nor substantial shareholding relief (for companies) are available for property investment companies and holding the let properties in a separate company will avoid undermining the trading status of the development company.

Finance costs

It is essential to maximise tax relief for this expenditure.  Points to consider are:

• Finance expenditure for property developers will be generally allowable.

• If finance is specific to a development then relief for the costs involved will be carried forward until such time as the property is sold.

• However finance not specific to any particular development can be expensed when incurred thus accelerating tax reliefs.

• Tax relief can be delayed if finance is obtained from a related individual, partnership or foreign entity and the interest charged has not actually been paid within 12 months of the year end. 

• Finally, if there are deemed to be excess borrowings from related entities within large groups then tax relief for the finance costs can be lost if the company is considered to be thinly capitalised.

Conclusion

In a difficult period for property developers it is more crucial than ever that the correct tax structure for the business is in place and that maximum advantage is taken of tax reliefs available to the business.

Note

An article covering this topic in more detail can be found on the Wilkins Kennedy website VAT- adding to Home Builders Woes.