So… you are building a residential development in a company but how do you classify it?
For the property developers we act for, I would love to say they know with 100% certainty what will happen, but in truth the property could be sold, or let out, and how it is treated makes a very big difference to how we handle it as their accountants and financial advisors.
Here’s an overview of the benefits & pitfalls of the options available to you as business owners and property developers, highlighting the need to have a great accountant on your side to help you choose the best financial path.
Show the development as an Investment
No entrepreneur’s relief if you sell the company
No business property relief for inheritance tax on the shares
Tax relief on loan interest – YES, but you can only claim this after you’ve started renting.
For example, if you spent 2 years developing property, you can’t claim the expense of loan interest until the accounting period when you start to rent the property. THEN you can claim all 2 years’ worth of interest in one go (you can go back up to 7 years before rental business started to claim pre-rental expenses – PIM2505).
nb. If you’re already renting other properties, the rental business has started, so you CAN deduct interest relating to the property being developed straight away
VAT reclaim – this is not allowed while developing an investment property (you can recover VAT based on intention for property, so by showing as investment this indicates intention to let out). This might not be an issue if all costs go through a contractor who ‘zero rates’ new build residential. If you change mind & sell before it’s ever rented then you can reclaim all VAT incurred over last 6 years (pay back rule)
Show the development as Stock or Work in Progress
Entrepreneur’s relief for capital gains tax, business property relief for inheritance tax, VAT reclaim and immediate tax relief on loan interest all apply here
If you decide to rent “stock” property & reclassify in the balance sheet from a trading asset to a fixed asset/investment, this triggers a market value appropriation where there would be a deemed disposal at market value with tax due on the resulting potential profit (despite no cash proceeds!) This could cost a lot - do not underestimate this
If you want to transfer to a capital gains group company (no gain, no loss), you need first to appropriate to investment (with tax implications) & then transfer. Or “sell” to subsidiary so as not to tarnish trading status (receiving co benefits from uplift in base cost). However, there may be SDLT (Stamp Duty Land Tax) implications, although reliefs are available.
It’s a chat, its proper review, and it makes a big difference, it’s more about avoiding the landmines than making a gain though.
If you’re in this situation and want to talk it through to make sure you have all of the information you need to make a sound decision and get some valuable advice, make sure you get in touch for a free, no obligation appointment here at JLA Chartered Accountants
Email us: firstname.lastname@example.org
Call us: 020 8441 1140