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Property development or property investment?

Some property developers entered the market and spent significant sums of money renovating and developing a property with a view to selling it at a profit. The property is mortgaged.

They were subsequently unable to sell it at a reasonable price due to the housing market decline. To cover the mortgage interest and the other ongoing costs (service charge, ground rent) they let it at a market rent for 6 months. Now the property is vacant they are hoping to sell it and to resume their property development ambitions.

My question is, will HMRC accept they are property developers or will HMRC now insist that the property is treated as an investment for tax purposes? The owners of the property wish the property to be treated as a property development because of the large sum of money they have expended in renovating it which they believe they will lose otherwise.

Any comments or advice welcome.

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By ChrisDL
27th Dec 2010 16:18

Practically speaking...

People with more knowledge of legislation will be able to give you a proper answer, but from a practical point of view you will probably be OK treating it as a development, if the let is purely a short term arrangement and that the owners intention is still to sell.

If accounts are being prepared then the property should be shown as stock/WIP and you might consider making a white space disclosure on the next tax return filed.

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27th Dec 2010 17:51

Thanks Chris

I will follow your advice. Development properties generally produce a higher tax take and so I am hoping HMRC will not contest the matter. Let us hope they are as pragmatic as we are!

Stephen

 

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By neileg
29th Dec 2010 11:32

Eh?

The costs of renovation will be taken into account regardless of how HMRC regard the status of the purchase and sale.

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29th Dec 2010 11:59

How so?

If the property is an investment then the base cost for capital gains tax is the purchase price plus any incidental costs at the time of purchase.  As far as I know the renovation costs, despite being capital costs, do not figure in the capital gains computation and hence can not be matched against the selling price when the property is sold.

Property development obviates the need to distinguish between capital and revenue expenditure and all costs, including the renovation costs, can be matched against the selling price of the property when it is sold.

If anyone can confirm or refute my understanding I would be most grateful.

 

 

 

 

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By blok
29th Dec 2010 12:30

.

As far as I know the renovation costs, despite being capital costs, do not figure in the capital gains computation and hence can not be matched against the selling price when the property is sold.

This statement is wrong.  All costs incurred are allowed in the capital computation, so long as the expenditure is reflected in the sale price. 

Tax is not fair sometimes , but it is not that unfair!

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By MBK
29th Dec 2010 13:24

Actually, not all costs are allowed in a CGT scenario

The costs of improvement are allowable, but interest cannot be treated as part of the cost - although it can be set against the rental income.

Contrast with development, where all costs will ultimately be deductible.

In the circumstances described this is definitely development - not CGT.

 

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By blok
29th Dec 2010 13:46

.

I knew someone would pick up on that!

If its a company, the company can offset the non trading loan interest (debit) against the capital gain so in effect you would get relief indirectly.  if its not a company then you are stuck on that part.

 

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By neileg
29th Dec 2010 16:03

Thanks

Thought I was going mad for a minute, there!

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29th Dec 2010 21:50

Thanks everyone - you have been most helpful. Apologies to Neileg for my confusion.

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