Property development tax

Property development tax

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If i owned a a site, paid £450k for it, another £450k for the loan to make the development and interest chargers, and sold it for £1.8m, how much tax would i have to pay? I was thinking of maybe selling some of them for example £900k worth so there would be no capital gains,would i still be liable for any tax charges?

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By johngroganjga
12th Dec 2014 10:03

If you bought the land with the intention of building on it and selling on the profits you make will be trading profits not capital gains.  There are far too many variables to do an actual calculation of the tax liability, but you will be aware that the rates of income tax go up to 45%. Over what period would the sales be spread for example?

I am not sure why you think there will be no profits if you only sell half of the units and retain the others.  I can't see any reason why the profit you make on selling half the units would not be about half of the profit you would make if you sold all the units.  What makes you think otherwise?

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Replying to lionofludesch:
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By Siamak
12th Dec 2014 10:10

Wishful thinking on my part, if i kept the properties would i be taxed on the gain in value of the development? 

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By johngroganjga
12th Dec 2014 10:17

Yes none of the profits or gains you make in a venture of this type will be tax free.

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By awoodj
12th Dec 2014 10:29

For the sums of money involved as well as your lack of understanding of the basics, my suggestion, get an accountant to advise you. Ideally you should do this before you start, the sooner the better. Things like developing in a company or personal name should be considered right at the start, harder to correct later and difference in tax could be substantial. The information required to make all those decisions correctly is not really suited to a forum post with the amount of information supplied.

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Replying to unearned luck:
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By Siamak
12th Dec 2014 10:45

I have not started anything yet, i am still trying to get planning permission, but when i do i will get an accountant who is an expert in my field. I know a property developer who keeps his properties and rents them out to avoid paying taxes, i was wondering how he did this. So you are taxed on property gains? is this different from buying a BTL and the value of the property increases due to increased property prices? I thought the same principle applied to property development, you only pay taxes if you decide to sell the property where your profits are taxed. 

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By johngroganjga
12th Dec 2014 10:51

You pay taxes when you sell properties, or on income you earn from them before you sell them.

Refraining from selling properties is not a clever dodge to avoid paying taxes.  If you want a clever dodge to avoid all property taxes completely it's quite simple.  Just don't buy any properties in the first place.

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By awoodj
12th Dec 2014 10:55

You pay tax on any rental profits so unless you don't make a profit you pay tax if you keep the property or not. If he keeps properties and rents them out then he is a property investor and not a developer, sounds pedantic but there is a significant difference between the two in tax terms. If you sell at a profit then tax will depend on if personally held or in a company and also if they were held as an investment for some period or just sold after completion of works. Vat, CIS, Stamp Duty and many other things come into this and they all interact with each other, you really need to consider all those things now. If you are trying to get planning permission then you have already started and the tax implications are already started too. Now is the time to speak to someone specialist in property development/investment taxation. There a quite a few knowledgeable people on here, you might want to try and source one local to you.

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By Portia Nina Levin
12th Dec 2014 10:59

What the OP is suggesting

Is that rather than pay income tax on the development profit, the properties are rented after development and then sold a short time later.

It is then held out to HMRC that the intention was always to rent the properties, but then offers were received that were too good to refuse, and the gain is liable to CGT.

Respondents may know this better as tax evasion.

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Replying to SXGuy:
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By Siamak
12th Dec 2014 11:22

Response

 

 

He just keeps the properties and rents them out, i will ask him to explain it to me a bit more deeply. THe way i see it is that he avoids paying taxes on the gains he has made, he only pays taxes for the rent he gets which would be the same if he bought some properties elsewhere. Atleast this way he avoids paying some taxes, that being said i will ask an accountant i know. 

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Replying to pauljohnston:
By johngroganjga
12th Dec 2014 11:33

Avoiding tax

Siamak wrote:

He just keeps the properties and rents them out, i will ask him to explain it to me a bit more deeply. THe way i see it is that he avoids paying taxes on the gains he has made, he only pays taxes for the rent he gets which would be the same if he bought some properties elsewhere. Atleast this way he avoids paying some taxes, that being said i will ask an accountant i know. 

He is not avoiding paying tax on his gains.  He will pay tax on all his gains when he comes to sell.  Like I said refraining from selling properties is not a clever dodge to avoid tax. 

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Replying to Jennifer Adams:
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By Siamak
12th Dec 2014 11:56

If he never sells, how is it a bad idea to hold the properties? Someone posted here that you will pay taxes when you refinance, so he will technically not be able to borrow against the properties, however what he could do is use them as a security when applying for a loan against another development and still avoid paying taxes? 

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By awoodj
12th Dec 2014 11:26

That would be property investment then, fairy standard stuff and a few books from Amazon or Tax Café etc. on property investment taxes would give you a rough idea. That assumes you don't need the money back which will be most likely somewhat tied up in the property even if you take finance against them.

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By johngroganjga
12th Dec 2014 12:27

Who said it's a bad idea to hold properties?

Who said you pay tax when you raise finance against a property?  Nothing could be further from the truth.

Yes you can use properties as security for other loans.  Borrowing money does not trigger any tax liabilities.  As you keep being told, you only pay tax when you sell properties at a profit, or receive rental income from them. 

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paddle steamer
By DJKL
12th Dec 2014 21:21

Beware though

 

If you initially carry the property as trading stock for resale and then reclassify as investment property you will then create a profit liable to tax notwithstanding you have not "sold" the properties to a third party.

As advised by awoodj above, property transactions are best managed by early planning not post event planning. In addition often taxes on profits are not the only significant taxes to consider, amongst others vat on property can be complex and expensive if the business model is not thought through carefully beforehand.

Given the sort of numbers involved within property transactions it pays to take paid advice early.

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Replying to Ranse:
paddle steamer
By DJKL
13th Dec 2014 22:05

Well for a start

Siamak wrote:

[i] If so, when ; and what was the specific purpose [both short-term and, if different, long-term]. Purchased it in 2010, is was for storage and trading, but i have stopped that now

[ii] If not, when do you expect to purchase ?

 

Are you/ will you be the sole owner ? [if not, please indicate the co-owner(s)]. Sole owner

How was the site [or will the site be] financed ? It has a morgat\ge of 30%.

What will you do with the site if planning permission is not granted ? I will clear out my stock and rent it out

What exactly is the site now  [eg open field] ? Warehouse

Have there been previous applications for planning permission [ by you or by others} ? Yes, two storey comercial property by someone prior to 2010. I want a three storey residential development.

 

I am 23, so i have no idea about taxes, just what i read and learn from others. I was taught to ask questions and not to be scared to learn. I will talk to a accountant who specialises in property after i get my planning, i am not going to worry about something i have no even got yet. If i don'[t get the planning there is no point to invest too much into finding ways to approach the sales/rentals unless i get the planning. Etheir way if i need to get the planning permission, what can an accountant exactly do that will change that factor? 

 

Well, for a start, an accountant can advise, based on your future plans, if the entity owning is advisable/ a different entity would be more appropriate, before planning is given (if given) and the tax cost of moving to a more suitable entity escalates due to higher site value as a result of the planning being granted.

If you do not consider ownership/operating  structure prior to planning and a subsequent change in ownership ,to say a limited company, is advisable post planning, you may regret not taking the advice earlier, but your call. I will mention that accountants tend to earn far more from sorting unplanned situations for clients as against advising them before the event, however it is your money.

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Replying to Ranse:
paddle steamer
By DJKL
13th Dec 2014 22:17

Foresight better than hindsight re property

"If i don'[t get the planning there is no point to invest too much into finding ways to approach the sales/rentals unless i get the planning. Etheir way if i need to get the planning permission, what can an accountant exactly do that will change that factor."

 

The fact you mention sales/rentals of either a conversion from existing commercial property or bare site new build flags possible issues re vat  that could be expensive. In addition there is the vat on the professional services you are no doubt paying for re the planning process itself at the moment and your long term ability to reclaim the input vat and not have to repay same later.

Structure and forward planning is crucial with property development; I speak here as someone who has been employed within the property investment/development industry for over fifteen years.

 

 

 

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By Siamak
14th Dec 2014 09:07

Conclusion

Let me get this straight, if i decide to keep the properties and rent them out, the only tax i would pay for is the rentals? If so, i will transfer the property to a ltd company once it is constructed to reduce the tax to 20% as opposed to the 45% bracket. I plan on keep the properties and using their equity to finance future developments, i am not making luxury apartments in london, it is affordable housing therefore they will give good rentals as opposed to luxury apartments which are usually sold after completion. My business plan is to bring affordable housing the london, keep my developments, and use their equity.

 

 

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By johngroganjga
14th Dec 2014 10:59

If you transfer the properties into a limited company after they are completed that will be a sale of those properties by you (to the company) on which you will pay tax at that point. As has been pointed out above it is vital to get the structure right before you start.

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Replying to fawltybasil2575:
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By D V Fields
07th Jun 2017 21:10

What an excellent and well thought out answer!

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Replying to D V Fields:
By mrme89
07th Jun 2017 21:28

Your post is fast and shows how responsive you are. Oh, hang on..

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Replying to D V Fields:
By Ruddles
07th Jun 2017 21:42

Zombie thread alert!

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