PROPERTY BUSINESS QUESTION

PROPERTY BUSINESS QUESTION

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Hello

Just a query from some one interested in buying and selling houses for a business.

My client is cash rich and is looking to buy houses and sell them with in 1 month. He will buy the property outright paying cash. He will roughly buy and sell 6 properites in a year.

The questions are:

1. What is the most tax efficient way for him to set-up this business?

2. what type of tax will he have to pay? is it CGT or can he register as a LTD and pay CT

Thank for your help in advance

Manzar

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By ii9ce
09th Dec 2011 17:28

Depends

Assuming your client operates on his own, we can disregards partneships.

This mainly leaves operating as a sole trader or under a corp. umbrella.

Given the risk involved in real estate, he may want the protection offered by operating via a Limited Company. However, this brings issues re 'double taxation' - the Ltd will suffer CT on its profits and your client will suffer PAYE on distributions paid to him. He can of course go the dividend route but the company gets no tax deduction but saves on NIC.

It may be worth running the numbers through both scenarios to see which is most tax efficient for your client.

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Teignmouth
By Paul Scholes
10th Dec 2011 13:28

Differentiate trading & capital gains

From what you describe your client will be trading, ie buying with a view to sale however, if he ever buys with a view to keeping for rent & capital appreciation, then this is a property investment business and will be treated separately, with property gains being taxed as capital gains.  

So the trade side is treated pretty much the same as any other trade and, as "119" describes, the tax efficiency of sole trader v Ltd Company are key.

On the capital gains side though, as an individual he will get an annual exemption whereas within a Ltd company the property will benefit from indexation allowance.  Also remember that property investment businesses do not get longer term benefits such as Entrepreneurs & IHT reliefs.

I only go on about this because I've had several clients in the past who have set out on this route only to find that they end up with a mess of trade & investment.  The differentiation between the two sides is pretty much determined by the client's intention when he buys the property.  I have had the situation however where a client finds a property difficult to sell and so puts it on short term let, this is OK, the property can stay as trading stock.

The rights or wrongs of Ltd Company v Sole trader are, as 119 has indicated, not that straight forward.  In addition to the unusual situation that trading stock can increase in value, if the Ltd Company ends up making a trading loss it's stuck in there, whereas as a sole trader it can be used against other income.  I know this can happen in any business but property trading is notorious for generating wide swings between profits & losses.

With such potential for uncertainty I'd usually recommend that the client starts things going as a sole trader and reviews things after a year.

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By manzar
12th Dec 2011 15:34

re: comments

Thank you very much for both comments.

Very helpful.

 

Kindest Regards

 

Manzar

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