Tax Considerations for Property Developers

The construction sector is ever-changing with new tax legislations altering regularly. Property developers must be up to date with the tax requirements. Here, we discuss important tax considerations for Property Developers.

The Structure of the Property Development business

The structure of the business can have a huge tax impact so you should consider this. For example, there is a major difference if your construction company is a sole trader or partnership compared to a limited company.

Sole Trader / Partnership

Being a sole trader or partnership opens you up for potential legal issues as you will be personally liable. This also means that you will personally be responsible for any losses and debts owed. However, this also means that any profits the company belong to the individual(s). You will need to register as self-employed with HMRC and submit an annual Self Assessment Tax Return (SATS). Being self-employed also means that you will either pay Class 2 or 4 of National Insurance. This is dependent on the level of profits your business is making.

Limited Company

Being a limited company as opposed to a sole trader or partnership provides the owners with more legal protection and limited liability. Any profits the company makes are taxed within the company at corporation tax rates. Net profits after tax then need to be extracted and are then subject to income tax on the salary or dividends received by individuals. This method provides more flexibility and can be extracted at a level suited to other income. You will be charged Class 1 of National Insurance as you will all be classed as employees of the company and will be automatically deducted by the employer. There are 2 types of Class 1 (A or B) depending on whether the employer pays this tax directly on their employees’ expenses or benefits.

Is the business a trade?

The second thing a property developer should consider is whether their business is a trade or not.  This is because the HMRC distinguishes between trading in property and investing in property. Under FA 2013 section 183(4),2 “property development trade” means a trade that:

1. A) consists of or includes buying and developing for resale residential or non-residential property and
2. B) is run on a commercial basis and with a view to make a profit.

If HMRC determines the business is not a trade, then gains on property disposals will be subject to Capital Gains Tax (CGT) rather than income tax. At the time of publishing this article, CGT has lower rates but this may change in the future as HMRC look to simplify taxes. If HMRC determine it is, in fact, a trade, then profits are taxed according to the structure of the business (please see point 1)

There is no single determinant for deciding whether a business qualifies as a trade. HMRC look at badges of trade such as frequency of transactions, financing arrangements, number of similar transactions, time between purchase and sale of assets, and much more.

Anti-avoidance also needs to be taken into account. This applies where a person is not trading but the main reason for acquiring or developing land is to make a profit. Any profit in these scenarios will be treated as trading income as opposed to capital gain.

Reporting Requirements

Property Developers should also consider the reporting requirements when it comes to tax. Reporting depends on the following factors:

• Whether activities are trade or capital disposals
• What the structure of the business is

Capital Gains Tax Reporting

• Capital disposals are all subject to CGT. If a UK residential property is disposed of by a UK resident, it is very likely to be required to report the disposal and the gain within 30 days of completion to the HMRC using an online reporting system. Tax will also be payable within 30 days.
• If a non-UK resident is disposing of a UK property, they will need to report this within 30 days even if there is no chargeable gain.
• If it is a company disposing of property, they will need to report on the Corporation Tax Return usually within 12 months from the end of the accounting period.

Income Tax Reporting:

• Individuals may need to report non-PAYE income such as dividends or benefits received from the company on SATR
• If the business is trading as unincorporated, they will need to register for self-assessment as a self-employed trader and report business profits via the SATR for each accounting period.

Choose your accounting year-end carefully

Another tax consideration for property developers is the accounting year-end. Choosing accounting year-end is an important consideration. 30^th April each year gives the longest delay between year-end and the Self Assessment tax filing deadline but overlap profits can only be relieved when the business ceases or the accounting reference data is changed so this may be taxed twice. 31^st March or 5^th April Accounting period date gives the shortest time between year-end and the filing deadline however no overlap profits should arise doing it this way.

VAT

It is important to know what your VAT rate is as the VAT treatment for the development of land and property can be complex. Therefore, VAT needs to be considered carefully to ensure all obligations are met and penalties are avoided. There are three VAT rates that can be applied to costs that are incurred on a property development project. These are Zero rate, reduced rate, and standard rate. The VAT depends on the type of land or property being sold as well as its use:

• For freehold sales or long lease in the new dwelling, communal residential or relevant charitable buildings by the person constructing- zero rate VAT is applied
• For freehold sale of other types of new (new being defined as being sold within 3 years of completion) or partly completed buildings (e.g commercial buildings such as factories, shops, warehouses, and offices) the standard VAT rate applies
• If a supply would normally be exempt, there may be an option to tax the land itself, meaning VAT must be charged on the supply at the applicable rate but normally this means the VAT incurred in making the supplies is then recoverable.

Annual Tax on Enveloped Dwellings (ATED)

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000. Property development trades are exempt where a single-dwelling interest is held by a property developer “exclusively for the purpose of developing and reselling the land in the course of the trade” but HMRC can challenge whether the business is a trade.

In a recent case, a taxpayer made a claim for ATED relief but was denied on the basis of not being a property development trade. This was because the original intention for the property was not to develop it for sale. This scenario shows that property development is not automatically a property development trade. The intentions when a property is acquired are taken into account can prevent ATED relief from being granted.

Stamp Duty Land Tax (SDLT)

SDLT will be applied to property purchases that are over the SDLT threshold. Any SDLT must be paid within 14 days of completion. Higher rather of SDLT applies to the purchase of additional dwellings.

Consider the Future

Tax considerations for property developers must be future-proof. Developers should consider the future of the company and have an understanding of the implications of this from a tax perspective. For example, if you retain profits within your business, this can potentially cause tax problems when it comes to succession planning. This can perhaps be overcome by keeping the investing and trading parts of the business separate.

As part of your succession planning, you may also need to keep key members of the team. To do this, you may mix salaries with additional equity-based incentives or pension contributions. All of these aspects will need to be planning in advance to ensure tax implications are considered and planned for.

As this article shows, there are a lot of tax considerations for property developers. With a myriad of different taxes potentially applicable to you, you must understand the various types and what you need to be aware of.  Whilst this can seem overwhelming, your accountant will be able to talk you through these factors in more detail and help you plan accordingly to ensure you are being as tax efficient as possible. Our team can provide advice to property developers to help you move forwards with your business and address any tax issues before they arise. To speak to a member of our team who specialises in property development then please get in touch.