Property developers, individual/company mix

Does this sound iffy to you?

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This isn't a client (we don't really do property stuff), just a development that's going on fairly near us that's intrigued me. I've snooped because they've caused us much irritation. Oversimplifying a bit, situation is:

Mr X bought a run down property (historically commercial if relevant), bought in personal name.

X owns Ltd Co Y.

Y has applied for the planning permission (converting to flats), and I believe is doing all the renovation work.

Snooping on accounts of Y, they gave enough information to suggest they're making and declaring a reasonable taxable profit. Also over last few years, company has never had a significant fixed asset, reinforcing belief it doesn't ever own the properties, just does the development (possibly could be coincidental timing, always sold just before year end...but I doubt it). This specific conversion is from commercial into flats, so combining this with company profit, I don't think it's a case of director tarting up his home and blagging through a company.

Did make me wonder how this might be working, and whether it's likely dodgy? I appreciate there's limited info above so speculation is required. If anyone has property developer clients and can perhaps shed some light on what's the likely underlying situation, I'd appreciate it. Is it normal to split things up like this?

Replies (6)

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By ireallyshouldknowthisbut
08th Jun 2018 13:31

The Ltd co may be supplying the individual at OMV for their services in renovations, ie acting as a building co. Personal holding may be easier to finance.

The individual ends up with not much profit, and most of it lands in the company.

It might help with suppliers etc if its an established company and not an individual in terms of credit, despite there being more risk for suppliers.

It might help with VAT as I think this would be a zero rate supply (?) so the ltd co get a reclaim. Cant remember off the top of my head.

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Replying to ireallyshouldknowthisbut:
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By Adam12345
08th Jun 2018 18:26

It won’t help with VAT. In fact it may hinder, especially if the individual is not VAT registered as well as the company.

The construction costs of converting a commercial building will be a reduced rate supply.

Co would charge VAT to individual. Individual will be able to reclaim the VAT subject to normal rules, I.e first grant of major interest. Will obviously need to be VAT registered as well.

There is no way of saying why/what/when without spectulating.

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By Watson Associates
11th Jun 2018 11:38

As Y is a separate legal entity to X you should look at it as though Y was a third party regarding profits, Vat etc. Obviously they will be operating it in the most tax-efficient way. My question would be; can anyone, other than the owner, apply for planning permission?

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Replying to Watson Associates:
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By DJKL
11th Jun 2018 11:49

It used to be anyone could apply for a PP in Scotland, I could apply for my next door neighbour if i wanted. There have been more recent changes re needing to show an economic interest up here, but if this link is accurate down south you have no such inhibitions (though you need to tell the owner)

"You don't actually need to own land to apply for planning permission for it. This means you can apply for permission before deciding whether or not to buy a piece of land.

The following people must be informed about a planning application relating to land or buildings they have an interest in:

The owner or all the part-owner/s (if you are not the full owner)
Any leaseholders with at least seven years' lease remaining
Any agricultural tenants"

https://www.planningportal.co.uk/info/200126/applications/59/how_to_apply/3

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By Maslins
11th Jun 2018 13:57

As DJKL says, I think basically anyone can apply for planning permission, but of course it should be with consent from the property owner. As suggested main reason might be someone buying a house, purchase process takes an age, they can have planning application submitted whilst purchase is ongoing so less of a wait between completion and planning result. Typically the owner of the property wouldn't lose out as the buyer would pay for the application, and pass of fail nobody has to proceed with it.

Anyway, seems like whilst as with anything there could be iffy, what we can see in no way proves it. Thanks for the thoughts, and apologies again for the speculative query with minimal info!

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Replying to Maslins:
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By matchmade
12th Jun 2018 16:41

If the existing building were capable of being used as a residential unit (for owner-occupation or renting out), or could be converted into one, it is often a lot quicker and simpler and cheaper to buy using a personal mortgage rather than a commercial one. Interest rates on personal mortgage for small developers are much less than commercial ones. Mortgage lenders and development loan providers in this country are incredibly sniffy about property loans to limited companies, whereas you can buy something to renovate or on a buy-to-let basis very simply.

I suspect the personal owner has written a Deed of Assignment, so that although the property is in his or her name at the Land Registry, s/he actually owns it "on behalf of" the limited company. The property is then treated as trading stock for the company, which does the renovation and/or new-build, pays interest on the personal mortgage, reclaims any VAT etc, then sells the new properties and uses the proceeds to clear the assigned mortgage and declare a taxable profit.

At a certain point the limited company will have enough capital and a track record that will obviate the need for such arrangements - banks will be willing to make commercial loans to buy the site and loan a good part of the development cost, at non-breathtaking rates of interest.

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