I have been speaking to several clients this week including a potential new client who is starting to get involved in property development and needed strategic advice concerning how to minimise his tax liability on these transactions including which structure to use etc. and whose own accountant had in his own words “given him a blank stare”.
From a tax perspective, problems can arise in that it is not always crystal clear whether a person is investing in property or trading as a property developer. This is a very important distinction as it determines how any profit on the eventual sale is taxed. In the case of an individual, a gain on an investment property would be taxed as a capital gain whereas profits made by a person trading as a property developer would be liable to income tax. In our current climate where capital gains tax rates are considerably lower than the highest rate of income tax, the attraction of realising a capital gain is apparent however there are severe consequences in getting this wrong.
Whether a person is trading is a question of fact and the normal ‘badges of trade’ apply. The starting point for deciding whether one is dealing with a trading or investment situation is the intention of the owner at the outset. Thus if you have a couple of properties you have bought to sell for a profit HMRC could deem this as trading and you would be subject to Income Tax on the sale.
HMRC have the power to go back from the start of your transactions and issue penalties and interest on the unclaimed tax amount.
I explained these various issues and options available to the new client and we set up a meeting to discuss matters further. I am pleased to say he was very happy with the initial advice and wishes to move all his tax affairs over to me. I will be setting up a property company for him as he will be making regular transactions in property over the next few years.
If you would like to discuss your own situation please email me for a free consultation.
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