By Simon Misiewicz
Are you confused about how to structure your property development project when it comes to tax?
Are you worried that you will pay a vast amount of tax?
The problem — developing land may be seen as self-employment trading
People who develop land often wrongly assume any profits will not be subject to income tax.
You may still be subject to income tax if you develop and sell a property even if you have a piece of land on which your home is built. As such you could be subject to 40%/45% tax, as well as National Insurance class 2 and class 4 liabilities.
You may have thought because it was your own property that it would not be taxed or at least that only Capital Gains Tax (CGT) would apply. However, HMRC can take a view that the new property was not an asset as you did not generate an income from it. As such it is not CGT but a trade and income tax that is therefore payable.
Can you relate to the above?
Can you see how people may pay more tax than they need to?
A real life client example — flip using a limited company
For the purpose of this article we are going to name my client John to protect his identity.
John is a higher rate taxpayer and puts in a planning application to develop a new property on his land, where his house resides. He realises that HMRC could come after him if he sells the property and makes a sizeable profit. As such he decides to split the title on the land and sell the land that will be built on into a limited company. John, in his newly founded limited company, makes £100,000 upon the sale of the developed property.
The amount of corporation tax due, at the time of writing, is 20%, which is much better than paying 40%/45% tax plus 2%/9% National Insurance.
John decides to keep the money in the limited company as he wishes to develop additional properties in the future.
As I have explained in a previous article, even if he wishes to pull money back out of the limited company, he may be able to claim entrepreneurs’ relief, whereby you pay just 10% CGT instead of paying 18%/28%.
Practical steps you should now take to develop and sell properties on your own land
It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy.
1. Set up a limited company.
2. Title split the land and sell to the limited company; for this you may need a RICS valuation. You will need to speak with your mortgage provider before you do this as it will decrease the value of your property.
3. Develop the property that is owned by the limited company.
4. Sell the property and file your accounts paying just 20% on the profit.
You may also need to consider Construction Industry Service (CIS) requirements if you are looking to develop a new build. I would suggest that you hire a main contractor that deal with all sub contractors.
Please also remember that there is no VAT to pay if you are building on brownfield sites.
Next steps — implement this development strategy
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.