Property Development Tax Issues
Discussion
Yes I know everyone is a property developer these days but I have seen a house and the numbers stack up so I have put an offer in.
What I want to know is what are the tax implications of this.
I have borrowed the money as a flexible advance against my existing house so there is no mortgage on the property.
Presumably all development costs, purchasing and sales costs along with the interest on the loan are deductable.
Hopefully this will leave me with a profit.
Is this a capital gain or do I pay income tax on it.
What is the best way of reducing the amount of tax I would need to pay?
Should I set up a limited company? sole trader? partnership? - if this one goes well I would like to do others.
I am a 22% tax payer and my Mrs B17NNS is a 40% rate tax payer - presumably it is best soley in my name?
All help and advice greatfully recieved.
What I want to know is what are the tax implications of this.
I have borrowed the money as a flexible advance against my existing house so there is no mortgage on the property.
Presumably all development costs, purchasing and sales costs along with the interest on the loan are deductable.
Hopefully this will leave me with a profit.
Is this a capital gain or do I pay income tax on it.
What is the best way of reducing the amount of tax I would need to pay?
Should I set up a limited company? sole trader? partnership? - if this one goes well I would like to do others.
I am a 22% tax payer and my Mrs B17NNS is a 40% rate tax payer - presumably it is best soley in my name?
All help and advice greatfully recieved.
Hi
Depends on how much you think you can make pure profit. It is a capital gain, so if in both names you can use both your annual allowances before you need to pay tax.
Also depends if either of you have capital gains else where.
You will only be taxed on pure profit so make sure you ring fence any extra mortgage payments (interest only) you are making for the further advance. As well as all the other deductable costs you have already mentioned.
Adrian
>> Edited by smirnoff on Thursday 19th January 11:44
Depends on how much you think you can make pure profit. It is a capital gain, so if in both names you can use both your annual allowances before you need to pay tax.
Also depends if either of you have capital gains else where.
You will only be taxed on pure profit so make sure you ring fence any extra mortgage payments (interest only) you are making for the further advance. As well as all the other deductable costs you have already mentioned.
Adrian
>> Edited by smirnoff on Thursday 19th January 11:44
Not knowing how your existing home is owned, ie under who's name, but if the one you're planning to develope is your 'main residence' than you can avoid capital gains tax. So its a good idea if you can arrange it so that you or your wife are the registered owners and live there as your home.
If you have bought the property as a one off then it is more likely that it will be covered by Capital Gains Tax. In this case, the initial cost of the property, including all legal costs, estate agent's fees and stamp duty make up the initial purchase price. Added to that are all the costs (including finance costs)incurred in "doing up" the property. Finally, when the property is sold, the gain is calculated by subtracting these costs from the selling price (less selling costs). As has already been mentioned, under CGT rules, an individual has an axtra CGT annual allowance of £8,500 (2005/06) which they can deduct from the actual Capital Gain before calculating the taxable amount. Obviously, if the property is jointly owned, both parties can utislise their £8,500 allowance so essentially eliminating £17,000 profit from tax. The £8,500 allowance will probably be increased for tax year 2006/07 (it usually goes up by a few hundred pounds each budget).
If you are running a property development "business" then you would be taxed on net profit achieved each financial year on the buy and selling of developed properties. Profits would be essentially caculated in the same way as above with maybe a few more expenses being allowed because it was trade. However, you would not be entitled to the £8,500 CGT Annual Allowance.
Whether the activity constitutes a one off capital gain or is the first stage in a property development business is down to you.
If you are running a property development "business" then you would be taxed on net profit achieved each financial year on the buy and selling of developed properties. Profits would be essentially caculated in the same way as above with maybe a few more expenses being allowed because it was trade. However, you would not be entitled to the £8,500 CGT Annual Allowance.
Whether the activity constitutes a one off capital gain or is the first stage in a property development business is down to you.
Thanks Eric.
Sounds like it is probably best to do this one on a capital gains basis (against both of us) and should it prove successful and we wish to persue and do more properties do it as a business.
Is CGT payable annually in April? If so would be nice to get this one done and dusted by then so I can utilise next years alowance for the next one.
Sounds like it is probably best to do this one on a capital gains basis (against both of us) and should it prove successful and we wish to persue and do more properties do it as a business.
Is CGT payable annually in April? If so would be nice to get this one done and dusted by then so I can utilise next years alowance for the next one.
CGT is paid under the Self Assessment tax system. If you were able to buy, do up and sell the property between now and 5 April 2006, you would (hopefully) made a Capital Gain in the tax year 05/06. That means you would need to complete a Self Assessment tax return for the year 2005/06 and ask for the Capital Gains Supplementary Pages. The 2005/06 tax returns will start to be issued by HM Revenue and Customs AFTER 6 April 2006. You can leave your request for a blank return until after that date.
Once received, you have until 31 January 2007 to complete and submit the tax return. 31 January 2007 is also the date for paying any tax due (including CGT) in respect of tax year 2005/06 under the Self Assessment system. If you want HM Revenue and Customs to calculate the tax for you, you will have to submit a "paper" return before 30 September 2006. Alternatively, you can try on-line filing right up to 31 January 2006 but I am not sure if the Revenue's on-line filing software can cope with Capital Gains.
If you complete the sale after 5 April 2006, it will fall into the next tax year (2006/07) and defer any liabilities arising for a whole 12 Months. Also, there is a good chance that the Chancellor will increase the CGT allowance as he usually does (although that's never guaranteed). This would obviously help reduce any tax bills.
If you plan on doing this on an annual basis or have more than one development property "on the go" at any one time, the Revenue may not be happy with you claiming that these are one-off Capital transactions and may insist that you are really running a business. You have to be careful here. As I said, it is up to you to some extent (that's why the system is called Self Assessment) but the Revenue do have the powers to redefine your activities in the light of factual evidence.
>> Edited by Eric Mc on Thursday 19th January 13:34
Once received, you have until 31 January 2007 to complete and submit the tax return. 31 January 2007 is also the date for paying any tax due (including CGT) in respect of tax year 2005/06 under the Self Assessment system. If you want HM Revenue and Customs to calculate the tax for you, you will have to submit a "paper" return before 30 September 2006. Alternatively, you can try on-line filing right up to 31 January 2006 but I am not sure if the Revenue's on-line filing software can cope with Capital Gains.
If you complete the sale after 5 April 2006, it will fall into the next tax year (2006/07) and defer any liabilities arising for a whole 12 Months. Also, there is a good chance that the Chancellor will increase the CGT allowance as he usually does (although that's never guaranteed). This would obviously help reduce any tax bills.
If you plan on doing this on an annual basis or have more than one development property "on the go" at any one time, the Revenue may not be happy with you claiming that these are one-off Capital transactions and may insist that you are really running a business. You have to be careful here. As I said, it is up to you to some extent (that's why the system is called Self Assessment) but the Revenue do have the powers to redefine your activities in the light of factual evidence.
>> Edited by Eric Mc on Thursday 19th January 13:34
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