Follow up to ques: Property development tax advice

Question:

Dear Sirs

Thank you very much for your prompt and almost immediate and informative reply to my question entitled "Property development tax advice" earlier today, regarding buying a land, developing it into houses and selling them in the most tax efficient way. I really value your very clear and informative answers.

Following from my question, I have the following queries which I would be grateful to get help with:

1) Is there anyway of being taxed on the profits as capital gain? and is there an advantage in that? I know CGT is 18% for individuals together with £10,100 allowance for 2009-10, but what is it for a limited company and are there any allowances?

2) If I set up a limited company, how should I extract profits? are dividends the best way since I will be shareholder of the company (I assume when you mentioned "If you did extract cash there would be a tax charge at 25% on amounts above the £40K higher rate band... " was referring to extracting the profits through means other than dividends?

2a) On a side, quick question related to question 2, can I set up a limited company as the sole director and sole shareholder or do I need to include someone else?

3) If I set up a limited company, and I decide to retain the profits for another investment, does rollover apply here, where I can quickly buy another investment with the profits to avoid being taxed on the profits before the end of the tax year (this is my understanding of rollover, please correct me if I am wrong)?

4) Why would I be classed as property trader rather than property developer? and does this make a difference in my case of buying a land, building houses and selling them?

Many many thanks for your replies once again!

Answer:

1) Is there anyway of being taxed on the profits as capital gain? and is there an advantage in that? I know CGT is 18% for individuals together with £10,100 allowance for 2009-10, but what is it for a limited company and are there any allowances?

It all hinges on whether you would be classed as a property trader or property investor. If a property trader in many ways using a company is preferred to avoid the higher rates of income tax, and NIC on the trading profits. If however you would be an investor, using a company would probably not be the preferred option.

As you state you could own the properties personally and sell with the benefit of the 18% rate of CGT (and the annual exemption). You could also consider occupying one or more of the properties to claim principal private residence relief to further reduce the gain. Another option would be to become non resident and sell free of CGT completely.

If you were an investor and used a company the company would be taxed at 21%-28% on the capital gain, and there would also be a potential tax charge on the extraction of the profits -- as outlined in the previous response.

In terms of whether you are an investor or trader it hinges on your motive/intention behind purchasing the properties. If your plan is to build, develop and sell you would be a trader. If you could build, develop and then rent you'd be an investor. You could consider a mixture (in which case the investment properties should be held personally to reduce the tax on the future disposal). We'll publish an article on property trading v investment next week.

2) If I set up a limited company, how should I extract profits? are dividends the best way since I will be shareholder of the company (I assume when you mentioned "If you did extract cash there would be a tax charge at 25% on amounts above the £40K higher rate band... " was referring to extracting the profits through means other than dividends?

Dividends are generally the preferred option. Dividends up to the higher rate band (eg around £40K are at an effective 0% (ie 10% tax charge but the 10% tax credit offsets this).Dividends above this are at an effective 25%.

2a) On a side, quick question related to question 2, can I set up a limited company as the sole director and sole shareholder or do I need to include someone else?

Yes I believe you can set it up as a sole director & shareholder.

3) If I set up a limited company, and I decide to retain the profits for another investment, does rollover apply here, where I can quickly buy another investment with the profits to avoid being taxed on the profits before the end of the tax year (this is my understanding of rollover, please correct me if I am wrong)?

You won't get rollover relief as if you're a property trader the profit is income not capital gain (and wouldn't qualify anyway). However retaining cash within the company prevents an income tax charge as it is not extracted.

4) Why would I be classed as property trader rather than property developer? and does this make a difference in my case of buying a land, building houses and selling them?

No, they are both the same (ie the terms property trader and property developer are interchangeable and mean the same for tax purposes).

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About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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