Property Development

One off property development project. Land used by a sole trader business but ltd co wise for this?

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Land owned by 2 sisters.  The land has been used for the purposes of 1 of the sisters sole trader business.

However, the intention is to close the business and planning permission has been sought to build properties.

A limited company had been set up for the purpose of this one off development.  The plan being to build and sell the properties and liquidate the company.

Could anyone offer any support regarding the initial land:

1. Presumably this needs to be sold to the company at MV (planning permission not yet granted so would MV w/o planning be appropriate?)

2. 1 sister will need to pay CGT at 20% at higher CGT rate but the other sister could claim entrepreneurs relief (would this only be if transferring the trade?)

3. Is there scope to retain the land outside the company? If so, though, presumably there would be income tax on the share of development profits

Thanks for any thoughts

Replies (6)

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paddle steamer
By DJKL
14th Nov 2017 14:49

I would take some specialist legal, tax and planning advice, a lot will depend on number crunching the perms plus art of the possible re funders (if they are needed).

Frictional costs re moving properties should be considered when looking at whether an actual sale into a Devco is needed or whether alternative JV/similar is possible. Existing latent gains are also a significant consideration.

What is possible may also be impacted re what is to be built, issues re common ground/block of flats as against discrete properties needs considered- developing is not just what suits re tax etc but is very much what will end purchaser want and require, a vision re the site may steer the structure into a different route.

With all these things it involves a lot of time wading through the detail and the numbers and talking with the banks re what is actually possible- experience also helps.

Re valuation I think any valuer ought to consider planning position re both local masterplan and any previous planning history when considering value, the argument has not got planning so is just worth existing use only goes so far, hope value does need considered.

Also he/she will need an idea re what could be built and will need to factor in things like LA contributions and affordable housing.

What I have done in past is worked back from Developed value less all costs (Build/ prof/contributions/notional finance/selling etc), less developer profit (say 20%-25%)and then discounted back re probability re getting planning, but we had to hand data re selling prices, likely site saturation (not just space, consider things like roads and traffic volume that will be allowed with say basic infrastructure and extra costs if say offsite works will be needed etc- having to move from say Cat 5 road to Cat 6 will impact, also playspaces, planing etc etc plus say estimates re utilities connections, build costs per sq meter etc .

For more expensive/bigger sites professional desktop appraisals are a godsend. (Plus finding a good valuer with the correct knowledge re actually building houses- this latter can be tricky as few appear to have a grasp re all facets)

Re specifics:

1. Maybe but maybe not, see above

2. Need to see if tripping tax at outset a good idea and required.

3.Possibly

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Portia profile image
By Portia Nina Levin
14th Nov 2017 17:08

1. There are alternatives structures for this. Whilst MV is deemed for CGT, SDLT and CT purposes, this does not necessitate sale at MV.
2. Sister 2 ain't getting ER, because she's a soletrader, and this ain't an asset of the soletrade business, and neither is the soletrade business (and its assets) being disposed of.
3. Yes, but what are you then selling?
4. Don't automatically assume that you will get ER on the liquidation either, even if you they don't go on to do anything similar within 2 years.
5. Not one for the internet. Come on tell us all how much profit is involved here?

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By pembo
14th Nov 2017 15:56

The reply from DJKL is a noble attempt to shed light on what are complex issues with a large degree of subjectivity. My take is:
1. Has to be at MV due to connected status that would at this stage include considerable hope value (if not full value with PP) given that the context of your question is almost as a fait accompli. By the time you ask these sort of questions its often too late although with CGT at max 20% of little concern. In fact depending on SDLT/other costs you may want to max out (legit of course)the gain going in and let the sisters sort it out if they need to. If transfer at lower value the company pays the excess at not much below 20% + an exit charge on the sisters when wound up.
2. Both would pay at the marginal rate whether 10/20%. Not enough info re sisters trade - highly unlikely ER available but refer comment at 1.
3. Very messy and given above comments not recommended.
My main concern here would not be tax but their experience to do this. The number of people who have come unstuck adopting the "how difficult can property development be" approach is scary. Personally I would get PP and flog the land to the highest bidder !

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Replying to pembo:
paddle steamer
By DJKL
14th Nov 2017 16:10

Re your last point totally agree. Or often better still get the right preferred bidder to get the planning, say an option with a base price and a ratchet re numbers or sq ft built or many such perms etc may work.

It is so easy to get planning for what you (the non house builder) think should be built when the real housebuilder has other ideas as he wants planning for his timber frame standard offering that he can build so much cheaper ,and it is often easier to get the planning wanted day one rather than persuade the planning department afterwards to vary it.

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By SDGREEN
14th Nov 2017 21:34

Thanks for the comments.

If the business is transferred into the company (before cessation) together with the land then presumably the sister running the business can claim ER on her share?

Also, if they develop and sell property on the land (the project will last over 1 year) then surely this is a trade that will qualify for ER on exit, would it not? This is a one-off and there would be no further property development within 2 years to fall foul of the anti-avoidance.

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Replying to SDGREEN:
Portia profile image
By Portia Nina Levin
14th Nov 2017 22:52

SDGREEN wrote:

Thanks for the comments.

If the business is transferred into the company (before cessation) together with the land then presumably the sister running the business can claim ER on her share?

In my opinion, only on the business, but not on the land; which isn't an asset of the soletrade business, being in joint ownership between the soletrader and another individual. Unless the soletrader is just using her half for the purposes of the business?

SDGREEN wrote:

Also, if they develop and sell property on the land (the project will last over 1 year) then surely this is a trade that will qualify for ER on exit, would it not? This is a one-off and there would be no further property development within 2 years to fall foul of the anti-avoidance.

It does not fall foul of the targeted anti-avoidance procedure. However, the only away to find out whether it gets caught under the general transactions in securities counteraction provisions (now explicitly widened to include a capital distribution on a winding up within the definition of a transaction in securities) is to do it. With counteraction, your 10% tax rate (on the 81% of the profit left after corporation tax) might leap as high as 38.1%.

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