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Tax treatment of property development

Tax treatment of property development

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Hi, 

I have a client that buys properties, renovates them and then either sells them or rents them out.

Previously, the accountant that did his returns calculated them on the basis that any expenditure on the renovation of the property sat on the balance sheet until the property was sold and therefore would be taxed on the profit in the year of sale.

A subsequent accountant disputed this and re-submitted his last three returns on the basis that all the materials, labour etc that went into the properties were revenue expense and were written off in the year that they occurred - this creates a huge loss in the year of the renovation and a huge gain in the year of sale. As the original method meant that the rental income was taxed in the years that they occurred and the tax was paid, the previous accountant claimed the amount of the tax back.

Surely a rental property is classed as an asset and a property for resale is effectively stock and therefore the first accountant was correct?

I've googled this and I'm pretty certain that I'm right, I just need to be absolutely sure as the client won't be pleased if he's got to pay back the tax that he should've paid on the profit from the rental.

Is there anyway that I can correct this in the next return rather than re-re-submitting the old ones?

Replies (10)

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By johngroganjga
19th Feb 2015 16:39

Without going into the question of whether the costs go into WIP or fixed assets, which is not relevant to the question you ask, yes the first accountant, and you, are correct and the second "accountant" sounds like a cowboy. What kind of "accountant" was / is he?

Thanks (1)
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By BKD
19th Feb 2015 16:47

I wouldn't change anything

Certainly not without full knowledge of all the facts.

As you have found out, different accountants will deal with certain issues differently. Sometimes its clear that one of them is wrong, often it is not. The first thing I would have done is contact the immediately previous accountant and seek an explanation for his treatment. Depending on that explanation, I would probably advise the client that there is a chance that were HMRC to challenge it there could be an adjustment and that it would therefore be prudent to provide for additional tax in the meantime. He may not be pleased, but treating it that way makes it clear that it was the previous accountant that it was at fault and that it is not you that is forcing the tax to be paid.

Of course, if the previous accountant's reply leads you to the incontrovertible conclusion that he was wrong then you have a duty to tell your client and advise him to make the appropriate disclosure to HMRC.

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By ireallyshouldknowthisbut
19th Feb 2015 16:55

.

I think the question is, can we identify which properties are part of the trade of re-selling and which are part of the lettings business?

Then we can get to the correct tax treatment, which I agree would be stock for a trading business. 

Not withstanding the above about which property is in which business, if buying run down properties not suitable for rental in the purchased condition it sounds very much to me that the costs of getting them into a fit state to let would be a capital spend and not revenue in any case, albeit you can push the boundaries on this depending on the circumstances.  There is difference between buying a wreck that is boarded up and a tired property that needs some paint and a new kitchen. 

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Hallerud at Easter
By DJKL
19th Feb 2015 17:05

Agree with all of the above

I agree with all of the above.

As the first really tricky question is intent (often not documented) you may need to take some guidance from how, in previous accounts, the purchases of the properties were treated- were they included in fixed assets or current assets etc

If borrowed money used the loan applications/ correspondence etc, or even the way the loans are structured, may lend a clue to intent.

You also need to be careful where there has been change of intent and an asset is switched.

Remember that letting in itself will not of necessity render a property into a fixed asset, properties held as stock/WIP can be let and still be stock/WIP.

You do not say what type of entity this is, is it a sole trader or a company? Are accounts signed by the owner/director?

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Replying to atleastisoundknowledgable...:
Euan's picture
By Euan MacLennan
19th Feb 2015 17:10

Oh! Yes, he did!

DJKL wrote:

You do not say what type of entity this is, is it a sole trader or a company?

Sole-trader property developer ... in the brief description which does not appear when the question is opened.

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Replying to Kevinmck14:
Hallerud at Easter
By DJKL
19th Feb 2015 17:15

Live and learn

Euan MacLennan wrote:

DJKL wrote:

You do not say what type of entity this is, is it a sole trader or a company?

Sole-trader property developer ... in the brief description which does not appear when the question is opened.

I never spotted that before, I clicked through from latest answers.

Thanks,live and learn

 

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Replying to johngroganjga:
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By Numberwang
20th Feb 2015 09:31

..didn't spot that either!

DJKL wrote:

Euan MacLennan wrote:

DJKL wrote:

You do not say what type of entity this is, is it a sole trader or a company?

Sole-trader property developer ... in the brief description which does not appear when the question is opened.

I never spotted that before, I clicked through from latest answers.

Thanks,live and learn

 

I didn't spot that either! I'll bear that in mind next time!

 

So I guess I'll just get the client to state what the purpose is - presumably the difference determines whether we're talking CGT or trading profit.

Thanks (0)
Replying to dgilmour51:
Hallerud at Easter
By DJKL
20th Feb 2015 09:52

Interesting conversation

Numberwang wrote:

DJKL wrote:

Euan MacLennan wrote:

DJKL wrote:

You do not say what type of entity this is, is it a sole trader or a company?

Sole-trader property developer ... in the brief description which does not appear when the question is opened.

I never spotted that before, I clicked through from latest answers.

Thanks,live and learn

 

I didn't spot that either! I'll bear that in mind next time!

 

So I guess I'll just get the client to state what the purpose is - presumably the difference determines whether we're talking CGT or trading profit.

 

Accountant- What was your intention with the property when you bought it?

Client- Why, does it matter?

Accountant- Yes, it impacts how tax on its sale is calculated.

Client- Well, you tell me what I intended, thats what I pay you for

Thanks (1)
Replying to DJKL:
By mydoghasfleas
23rd Feb 2015 12:32

becoming more interesting .......

when the market drops..........

Client, you told me the capital gains option was best!

Agent, it was!

Client, but I am building up all these capital losses.

Agent, but when the market turns in 5 years or so you can use them

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By ringi
23rd Feb 2015 14:52

Read "How to Save Property Tax" by Carl Bayley

see http://www.amazon.co.uk/How-Save-Property-Carl-Bayley/dp/1907302751

I think your client needs new accountant, this is an area that has complex hard to decide rules, and therefore an accountant that is dealing with landlords and property developers every day is needed.

As I landlord, I would not use an accountant that was not a landlord themselves, I would also expect my accountant to be spending at least half of their time doing account for landlords and property developers.

http://www.fyldetaxaccountants.co.uk/property-articles for lots of articles written by a true expert that covers this sort of issue.

(A lot of the above answers have "half truths" in them but as I am not an expert I will not correct them.)

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