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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 15940
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Private owned property - auction purchased.

Customer Question

private owned property - auction purchased.
Submitted: 1 year ago.
Category: UK Tax
Expert:  Tony Tax replied 1 year ago.


Can you tell me how long there was between your buying the property and selling it please. How do you arrive at a value of £140K if you transfer the property into a company given the previous figures or haven't you done the work yet?

Customer: replied 1 year ago.
I purchased the property 27th July at Auction, I haven't done anything with it yet. I had an estate agent round today to give me the options. As its stands 140k, if I do it up 185k. If I develop it 285k.Regards
Customer: replied 1 year ago.
develop meaning splitting into two flats.
Expert:  Tony Tax replied 1 year ago.


Leave this with me while I draft my answer. It will take a while so please bear with me.

Customer: replied 1 year ago.
I am a 40% tax payer if that helps. also we don't actually need the money back out of the company (a new company), my thought was to keep developing properties and pay a yearly profit as a pension fund?
Expert:  Tony Tax replied 1 year ago.

Hi again.

Development costs along with other costs such as legal fees and mortgage interest will be taken into account in working out your trading profit. Not to allow development costs would terminate the construction industry overnight.

As you will read here, if you put the property into a company, you will make a capital gain if it is worth more than you paid for it. That will certainly be the case if you intend to build a portfolio of rental properties in which case the company will not be treated as a proper trading company, more as an investment company. If, however, you start out as a sole trader property developer and incorporate, you can claim incorporation relief which means that you get shares in the limited company in exchange for the property and there is no immediate capital gain. Profits from developing and selling property will be charged to corporation tax at 20%. The rate will come down to 19% and then to 18% by 2020. Take a look here for information on incorporation relief.

The problem with a company is getting the money out tax efficiently. Dividends can be heavily taxed as you are a 40% taxpayer. If you don't need to draw an income, you can leave the money in the company to develop more properties or at some stage in the future, close it down using a formal liquidation process so that you can withdraw the case as capital, not dividend, claim entrepreneurs' relief and pay CGT at 10% instead of at 18% or 28% or a combination of the two. Obviously, tax rules can and do change so relief avaialbel now may not be in the future. Take a look here for information on entrepreneurs' relief.

If you develop the property as a sole trader, then you will be pay income tax and national insurance contributions on your profit which will be higher than 20% corporation tax.

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.
Thanks, ***** ***** of helps. How do you go about proving development costs?If the company directors are myself and wife, can we put 10% of profits into our pension pot tax free - to be taken at 50?regardsMichael
Expert:  Tony Tax replied 1 year ago.

You keep receipts and invoices for your expenses.

As employees or directors, you can have the company pay into a personal pension plan or a company scheme which is more complicated but you can't access it until you are 55. That age will gradually increase over the coming years. Take a look here for information on pensions.

Customer: replied 1 year ago.
thanks for your advice, so have I got this right based on these figures.purchase price: 115k
development costs:60k - of course some will be cash in hand builders jobs so:
receipts from development costs: 40k
sale price: 285ktax would be 40% of 285k - 115k (purchase price)+40k receipts = 52kIf this was in a company I would pay corporation tax of 20% which would save around 20k on that tax bill - I would of course have to pay capital gains to switch the property in the first place and get a bill of around 4k for that but an overall saving of potentially 15k...?The end goal would be to keep the money in the company doing the same thing, buying\develop and sell with potentially using the personal pension to get the money out in the long term.Thanks
Expert:  Tony Tax replied 1 year ago.

You pay corporation tax at 20% on company profits (income less allowable costs in the simplest terms). On £285,000 - £115,000 - £60,000 you would pay CT of £22,000. You shouldn't be paying anybody cash in hand off the books. You ought to read about the Construction Scheme here.