Tax Treatment of Property Development vs Property Investment

by Mark Alexander

6 years ago

Tax Treatment of Property Development vs Property Investment

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Tax Treatment of Property Development vs Property Investment

Tax Treatment of Property Development vs Property InvestmentWith so many buy to let  property investors now considering buy/refurb/sell deals I feel the time is right to explain the tax treatment of property development vs property investment.

For example, did you knowthat buy/refurb/sell deals are taxed as a trade (property development) and CGT annual exemptions can not be claimed on disposal?

This topic arose recently as two of my readers contacted me for advice which resulted in the three of us paying a visit to my accountants to clarify matters for them. Please note that I am not a tax adviser.

The couple are in the process of buying a property for £120,000 and will spend a further £20,000 refurbishing it in the hope that it’s end value will be £165,000 which equates to a profit of £25,000. Added to this, the property has an oversized garden which may be split to create a building plot. If planning permission is obtained for that plot the profits will be significantly higher.

Whilst I was with this couple we ran the figures though this due diligence calculator which suggested that the property was not a good one to hold onto long term. Based on purchasing the property for cash and refinancing onto a buy to let mortgages after 6 months at 75% LTV  the cashflow (after allowing for all running costs) amounted to a loss of £10 a month. Interest rate increases would obviously increase the losses.

If the plan doesn’t involve renting though, the couple will need to register with CIS (the Construction Industry Scheme) and be responsible for the tax treatment of their contractors. They would also be taxed as a trade (property developers) as opposed to property investors. This would mean that profits would be taxed as income as opposed to capital gains. In their case, as they don’t use their capital gains tax exemptions elsewhere, this would mean losing £21,600 of tax exemptions between them as well as taking on the hassle of CIS.

For obvious reasons they made a simple commercial decision and will let the property for at least six months prior to selling it. This will make it an investment. Also, it will give them time to split the deeds of the land and to seek planning consent on the newly created plot. It they go on to sell both the property and the plot these will both be taxed as investments. if they time the sales right they may even be able to sell them in two separate tax years and get £42,200 of CGT exemptions in the process. Obviously this is well worth losing £10 a month on the rental cashflow and the accountancy fees they have paid.

They could develop the plot of land themselves but again this would be taxed as property development and require them to obtain CIS registration. Therefore, they will need to do some careful thinking before they decide whether to sell the land as an investment with planning consent vs developing it and potentially losing the CGT exempt allowances AND taking on the tax issues of their contractors under CIS.

Moral of the story

The above case study is an absolutely classic case of why people need to take professional advice. Far too many people choose to save a few hundred pounds in fees and end up paying £1,000’s in avoidable tax as a consequence of penny pinching. Sometimes they can also land themselves in big trouble with the tax man too.

Messing with the tax man can seriously damage you wealth!

This article is provided for guidance only and does not constitute financial advice. I strongly recommend that you take advice from suitable qualified professionals with Professional Indemnity Insurance. If you would like me to introduce you to my own trusted contacts please drop me an email outlining your circumstances in as much detail as possible and include your contact details. My email address is mark@property118.com – I do not charge for this service – read why here

For details of more articles and useful calculators for Property Refurbishment please



Comments

Tony Atkins

6 years ago

I'm a small-scale property developer via a limited company, currently building two new houses and with experience of renovating 10 houses. You only need to register for CIS if you employ people on a labour-only basis. If you employ a building contractor or even a single self-employed person like a bricklayer, provided they supply a proportion of the materials (even if it's just wall ties), you are not responsible for deducting their tax at source via CIS before you pay them. For example, on my current build valued about £400K I am employing a series of subcontractors for every step of the project; they all deal with their own tax and supply their own public liability and personal injury insurance.

Joe Bloggs

6 years ago

that sounds more like it...often professional advice is so cautious, guarded and generally poor, its a waste of time.

Joe Bloggs

6 years ago

i would like to thank the moderator for not censoring comments as far as im aware. i responded to a very poorly written article on property maintenance from upad over the weekend and it was not published. when a forum is cleansed of any negative comments its just advertising/promotion IMO. not too keen on the new security measures though!

Mark Alexander

6 years ago

Hi Joe, sadly I am sometimes required to sensor comments if they are in breach of our Terms and Conditions of use (see link at the foot of the website). Fortunately though, this is very seldom required. Please also see >>>
http://www.property118.com/index.php/what-property118-is-not/

6 years ago

I don't agree with Tony's tax treatment of his subcontractors. HMRC clearly indicates property developers as well as bricklayers etc to come within CIS. In a future the contractors may have another issue to deal with: a deduction of NIC for self employed subcontractors as it is on the way. Even at present, the contractors should protect themselves and have adequate and very well written contracts for services with each of the subcontractors in order not to qualify as employers and PAYE. Never mind the business insurance the subcontractors.

Simon Claridge

5 years ago

Tony I wish this were true but its not, you need to retain CIS at 20% or 30% on the labour element of the subbies invoice on any development that's not your PPR


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