First published in March 2021.Some of the reliefs mentioned have changed since (Entrepreneurs’ Relief is now Business Asset Disposal Relief). Talk to us before acting on 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 advisers.
Here’s an overview of the benefits and 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.
Option one: show the development as an investment
- No Entrepreneurs’ 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 two 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 two years’ worth of interest in one go (you can go back up to seven years before the rental business started to claim pre-rental expenses, PIM2505).
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 your intention for the property, so showing it as an investment indicates an intention to let it out). This might not be an issue if all costs go through a contractor who zero-rates new-build residential. If you change your mind and sell before it’s ever rented, you can reclaim all VAT incurred over the last six years (the payback rule).
Option two: show the development as stock or work in progress
- Entrepreneurs’ 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 and reclassify it in the balance sheet from a trading asset to a fixed asset or investment, this triggers a market value appropriation: a deemed disposal at market value, with tax due on the resulting profit (despite no cash proceeds). This could cost a lot; do not underestimate it.
If you want to transfer to a capital gains group company (no gain, no loss), you first need to appropriate to investment (with tax implications) and then transfer. Or “sell” to a subsidiary so as not to tarnish trading status (the receiving company benefits from the uplift in base cost). However, there may be Stamp Duty Land Tax implications, although reliefs are available.
Conclusion
It’s a chat, it’s a proper review, and it makes a big difference. It’s more about avoiding the landmines than making a gain.
If you’re in this situation and want to talk it through, so you have all the information you need to make a sound decision, get in touch for a free, no-obligation appointment.
Email us: info@jla.accountants
Call us: 020 8441 1140