I Am A Property Developer – Ask Me Anything!

Reply to the comment left by "Richard Mann" at "26/02/2015 - 13:45":

Hello Richard, It depends on your personal circumstances. Are you paid a salary in another job, do you have rental investment income, or will this renovation work and subsequent projects be your sole source of income? Do you already own a house, or will you be renting or living on-site during the renovation?

Reply to the comment left by "Tony Atkins" at "27/02/2015 - 11:21":

Tony

Many thanks for your advice. My experience so far with mortgage brokers has been that lenders want to know not only what the money is being used on, but what specific property i am buying despite the re-mortgage being on my own home. Any suggestions on how best to approach this?

Reply to the comment left by "Tony Atkins" at "27/02/2015 - 11:21":

Tony

Many thanks for your advice. My experience so far with mortgage brokers has been that lenders want to know not only what the money is being used on, but what specific property i am buying despite the re-mortgage being on my own home. Any suggestions on how best to approach this?

Reply to the comment left by "Tony Atkins" at "27/02/2015 - 11:21":

Tony

Also, if i repay the director loan without interest would this be taxable?

Hitch

Reply to the comment left by "hitch " at "27/02/2015 - 12:14":

Hitch,

You say "I", but it's the company that will be repaying the director loan, and this won't be taxable personal income for you. You will just be receiving repayments on the debt owed to you, just as if you were receiving £10 back from your friend Bert. Nor will the company pay any corporation tax on the loan: it's simply repaying a debt. Let's say the company buys the site for £300K, loaned by you. It then builds a house for £200K, also loaned from you. It sells the house for £700K net of agent and legal fees, and repays your loan of £500K. The gross profit is £200K, less company costs of, say, £40K (planning fees, travel costs, accountancy fees, etc), so the taxable profit is £160K. Corporation tax is £32K, leaving £128K for reinvestment, or distribution to the directors and shareholders (you) as dividends.

Note dividends are taxable, so you won't gain much by using a company if you add the dividends on top of your £50K salary (HMRC take into account the 20% corporation tax already paid). This is why it will benefit you to pay a salary to another family member, or to only take dividends in a year when your other income is below the 40% income tax threshold. Dividends are income tax-free if you are topping up a basic-rate income. Distributable capital can be rolled over year on year in the company if you wish to wait until you see an opportunity to pay it out in a more tax-efficient way.

Check with your accountant, but you can probably add your personal mortgage interest and costs to your director's loan, and not be taxed on it, provided the mortgage was exclusively raised to finance the company. It should be the same as for someone raising a mortgage on their personal home to finance a BTL investment: the interest can be deducted from your rental profits.

As regards lenders, what does your broker say about their right to ask about the purpose of the loan? What if you just want to buy a Ferrari? You can always change your mind after the loan is issued, and invest in your development company instead: the lender can't ask for its money back. Or find a suitable-looking buy-to-let investment and say you plan to buy that, then change your mind.

Reply to the comment left by "Tony Atkins" at "27/02/2015 - 11:27":

Hi Tony,

Thank you for responding.
This will be main source of income although I have a number of BTLS too, they make little or no profit.
I have a home that is my main residence. I have another Ltd company on standby which I could utilise for this venture if necessary. Loans ? Company name or mine? what is efficient ? Any advice much appreciated!!

Reply to the comment left by "Richard Mann" at "27/02/2015 - 19:58":

Hello Richard,

I am no expert in this area and no accountant, but the advice from my accountant and books like Carl Bayley's excellent Using a Property Company to Save Tax (mentioned in an earlier post) is that if you intend to be a serial renovator, the most tax-efficient structure is to put this work through a company.

Property tax is ridiculously complicated, but in brief, HMRC distinguishes between individuals and companies involved in investment (BTL, commercial property), trading (buy and sell, often with very little actual building work), and development (refurbishment, renovation, extension, new-build) and taxes these activities in different ways. Government policy, implemented by HMRC, favours you if you are prepared to invest labour and capital in the long-term growth of a limited company, and are willing to withdraw your proceeds in stages along the way. A BTL portfolio, no matter how many people you employ or your turnover, is in contrast not seen as a business at all, but as passive investment that can be taxed relatively heavily through personal income and capital gains taxes. Someone who trades in property is treated even more harshly and your gains are taxed on an annual basis under personal income tax.

You can renovate property as a self-employed sole trader rather than through a limited company, but you could face some hefty tax bills in years when you sell a property, as the sums involved will probably be relatively large. The great advantage of putting everything through a limited company is that you have greater control over the payment of tax and the distribution of profits. Most small developers pay themselves just over the National Insurance threshold, so they pay no income tax and minimal NI: just enough to earn your state pension entitlement. They then top up their income using dividends paid by the company on past profits. No personal tax or NI is payable on these dividends up to near the higher-rate income tax threshold, because the company has already paid 20%corporation tax on its profits, so there is a significant saving here of NI (employee and employer contributions). The company will also hopefully be able to keep paying you dividends, even if you have had a poor year in terms of sales, enabling you to smooth out fluctuations in your profits from year to year.

You can also register the company for VAT if over 50% of your work is new-build, and reclaim most of the VAT on costs and expenses put through the business.

Finally when you come to retire and wish to wind the company up or sell it, there is Entrepreneur's Relief which will allow you to release substantial profits free of personal taxes. I won't go into the details here: you need to do your own reading. You only mentioned renovating a single property, so in my view you are in danger of being treated as a trader unless you can show you have moved on to do similar projects. Alternatively I suggest you put this through a limited company, provided it then continues to show real business activity in later years.

Of course if you don't have many profits and need extra income in the early years, you will either have to improve the profitability of your BTL investments, or live off your capital, or just pay yourself more via the company and accept the tax and NI penalty.

As regards loans, unless you have a viable existing company with a good three-year profit history which you can deploy for your renovation activities, you will probably find it impossible to raise a loan in the name of the company. You need to find some investors or a business partner with capital. Otherwise the best way to finance a renovation is to buy the property using a personal BTL loan, which you then treat as being on behalf of the limited company: you still own the property on a personal basis, but for accounts purposes all work and profits on the property are put through the company and the house is treated as part of the company's working stock. Securing a BTL loan can be tricky if the property is a real wreck, as most lenders want the property to be "ready to rent". You often also need to show you have an employed income of £25K from other sources, which is where a spouse or business partner can come in very useful. However this isn't always true: some lenders will make a BTL loan despite you having very little external income. Alternatively there are lenders who do "renovation" loans: they will advance enough to buy the property - albeit at a low loan-to-value rate - and then advance more to fund the renovation, possibly doing this in stages as you achieve certain milestones and the property is judged to have increased in value. This is a specialist form of lending, so talk to a mortgage broker and read magazines like Homebuilding and Renovating or BuildIt.

Good luck,
Tony

Richard,

For refurbishment mortgages, also obviously check out past posts on Property118, and on Property Tribes: there's one today, for example, at http://www.propertytribes.com/-light-refurbishment-mortgages-t-13724.html.

Hi there.
I’ve got a few questions which I’m hoping someone can help me with (and today if possible, as I’ve got to answer my insurance company):
1. Does anyone know what the cost of ‘shoring up’ a neighbouring house is? – and what is involved? I have had to present a hypothetical quote to my insurance company – covering demolition, disposal of the whole building – because they don’t agree with my rebuild value. I sent in a quote suggesting my rebuild value was sufficient, but my builder missed out the crucial ‘shoring up’ of the neighbouring terraced house.
2.While we’re at it, any ideas about the cost of putting on a new roof as my builder’s estimate is £6,900 (yes, I know it’s on the low side, but is it possible at that price (it is end of terrace…)
3. My builder has put in ‘All services, gas, electric, water, BT – £10,000.’ Isn’t that way too much for the reconnection of services to a house in the middle of the city, where all the services are already there? (he also put in £3,800 for capping off all services to the property)
4. Any idea what professional fees would be involved in this? I would imagine an architect’s fee wouldn’t be high as they just have to replicate what was there, with a mirror image of next door, more or less. And what about structural engineers and building regs?
I’m hoping to be able to prove my rebuild value is legitimate or I’m only going to receive a proportion of the claim.
I would appreciate any help on one or all of my questions by my learned friends here present.
Thanks in advance.
Ros.

Reply to the comment left by "Ros ." at "10/03/2015 - 13:27":

Hello Ros, May I ask what this has to do with property development? I'm unclear what your project is: you refer to "the claim", so has your end-of-terrace been rendered uninhabitable by some disaster?

If all you're asking about is the notional rebuild value of an end-of-terrace house, it is very unusual to ask a builder to provide an estimate. Most people go off the BCIS tables, or the figure quoted by your mortgage provider's valuer when you first purchased the property, uprated to today's prices (use RPI inflation or I think the BCIS have tables of average price increases on rebuilds).

Another way to estimate a rebuild cost is to use the calculator on the Homebuiding and Renovating Magazine website: roll over Advice on the top menu and look for the Costs option on the right hand side. However this does not cater for terraced properties so it will be a bit of a guess - but then it usually is, as fitting-out costs alone can vary hugely.

I'm afraid I've no idea how much shoring up would cost. If you really need an accurate estimate for such a specialist question, I would talk with a quantity surveyor. Housebuilding and Renovating offers figures on utility connection costs, roof replacement costs and so on. You could also buy Mark Brinkley's Housebuilder's Bible.