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CGT on Self Build Plus Another Property

CGT on Self Build Plus Another Property

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I have just purchased a site with outline planning permission for up to two dwellings. One will be a self build, and the second will be a development to sell on.

Now, I know one option is to build one live in it a year, and then do the second one, however, we have two young children and I would like t minimise the disruption and get both properties built at the same time. However, I obviously want to minimise the tax due. I have a few thoughts but need some advice from someone with more tax knowledge than myself.

Thought 1) Convert as much of the gain to CGT as I can. The plot currently has outline planning permission for up to two dwellings. Once detailed planning permission is secured, the value of the plot will rise significantly. Is it possible to recognise some of the gain at this point (ie. utilising the £10k CGT relief both my wife and I have), and therefore starting with a higher "land" cost in the calculation of the property on the development property.

Ie. Plot bought for £220k - ie £110k per house plot. Once detailed planning permission is obtained, this will increase to £230k. We take CG relief of £10k each, and therefore no CGT is due. As no real transaction has take place it would only be some sort of paper exercise.

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By duncanedwards
21st Jul 2014 20:05

I suspect
That you might "get away" with CGT treatment if you just sold on as it is but anything else looks like an adventure in the nature of trade.

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By Paul D Utherone
21st Jul 2014 20:34

Sounds like trade from the outset to me

eve if you could "get away" with immediate sell on as above you might be hard pushed to back it up as CGT in the event of an enquiry

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Replying to crystalcom:
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By lisler
21st Jul 2014 20:58

Why "get away" with?

An option available is to set up a company and sell the second plot to it. Provided the sale is at market value there is nothing illegal, ethically or morally wrong for the new company to then develop the plot for a profit. It is a common tax planning strategy. 

As you rightly say if the plot is owned by more than one person then more than one CGT annual allowance will be available.

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By duncanedwards
21st Jul 2014 21:08

The OP admits to ...

a profit motive which I believe would make his suggested actions a taxable trading activity.

Interposing a company (presumably to be owned by the OP) wouldn't make it less so.  Arguably, it makes it look worse.  Presumably the company would be a property development company liable to tax on its trading profit - albeit possibly at a lower rate.

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Replying to Cloudcounter:
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By lisler
21st Jul 2014 21:51

Your point is?>

The OP has asked how he can reduce the tax payable on the activity. He has asked whether by selling part of the plot he can convert some of the gain from income to capital. The tactic he has asked about is a perfectly legitimate way of doing so by interspersing a corporate body. It may not reduce the overall profit in reality but it will transfer some of the total profit from income to capital. That has the benefit of reducing the overall tax burden by utilising annual capital gains tax exemptions. Also as you say Corporation Tax on the company's profits will probably be at a lower rate than an individuals if the profit were to take them into a higher tax rate. There is also more flexibility on when to take dividends, which may further minimise any tax liability.

Am I wrong in thinking that part of the service we should aim to provide our clients is to minimise their overall tax burden by using the legislation that exists?

 

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By tebthereb
21st Jul 2014 22:08

Seek advice

I think it is a bit harsh to say that the OP admitted a profit motive, let alone that there is a trade here. Sure a profit motive is one of the "badges of trade" but it is only one consideration and the OP did not say what his intentions were when buying the plot, only what they are now.

The OP needs to take professional advice ASAP. This could be valuable to them and needs to be done early as possible as retrospective tax planning rarely if ever works. OP, contact me directly if you like.

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By duncanedwards
21st Jul 2014 22:54

Only commenting on what was said by OP
Specifically : "... the second will be a development to sell on"

As I said in my first post, I think if the OP had been forced to buy 2 plots to secure the one he wanted and merely sought to sell the 'surplus' one on, that would not look like trading. He is considering generating value by developing (his word) the 2nd plot (perfectly reasonably). Is that not a profit motive?

Whether the costs and effort of setting up and running a company are justified by a tax differential saving is obviously a function of the sums involved.

I never said the use of a company (or any other planning) is not legitimate; I suggested it would make it more difficult to argue against trading treatment. HMRC might take an interest in the value at which the land is transferred to the company, for example.

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By trw144
22nd Jul 2014 06:50

further info
Just a little further info if it helps...I bought the plot primarily to build a bigger house for my family, I dont have to put two houses on it but it makes sense to. My thoughts were to setup a ltd company for the development - perhaps in my wifes name, as she will project manage the build, and as a lower rate tax payer can withdraw the profits out over a couple of years to minimise the tax.

I have nt looked into the costs of running a company in terms of fees etc but was a chartered accountant/auditor for many years so would be happy doing the work myself. Additionally my wife may do more developments in future so it would nt be just a one off use of the company.

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