New build development in personal name or through an LTD

by **deltaforce1** on Tue Dec 13, 2011 5:41 pm

Dear all,

I am going to undertake my first new build property development in the UK, and would like advice on the most tax efficient way to do this.

From my basic understanding, if I were to do this in my personal name, I would have to pay CGT for at least the first few new build developments, and thereafter the net profits would be taxed as income tax. How would VAT come into play, am I able to become VAT registered in my personal name?

With Regards to developing through an LTD company, again from my basic understanding, I would pay corporation tax on net profits, I would then have to pay dividend tax on any profits withdrawn, and then income tax on the dividend that i receive.

by **section 44** on Tue Dec 13, 2011 5:52 pm

deltaforce1 wrote:From my basic understanding, if I were to do this in my personal name, I would have to pay CGT for at least the first few new build developments, and thereafter the net profits would be taxed as income tax.

Your understanding appears to be wrong. Property development profits would likely be within the scope of income tax and not CGT.

deltaforce1 wrote:How would VAT come into play, am I able to become VAT registered in my personal name?

Yes, provided that you intended to make taxable supplies.

deltaforce1 wrote:With Regards to developing through an LTD company, again from my basic understanding, I would pay corporation tax on net profits, I would then have to pay dividend tax on any profits withdrawn, and then income tax on the dividend that i receive.

Your understanding appears to be wrong. The LTD company would pay corporation tax on its profits. You would pay liable to income tax on any dividends received. There may be other tax implications to consider.

by **deltaforce1** on Tue Dec 13, 2011 6:44 pm

Thanks,

What is the most tax efficient way to develop? Through an LTD or in personal name?

by **section 44** on Tue Dec 13, 2011 9:42 pm

It depends on potential quantum of profit per year and the extent to which you need to realise profit each year.

By retaining profits in a company, the profits will only be subject to corporate (lower) taxes. However, on realisation that additional personal taxes will bring the overall effective rate of tax closer to what it would have been had you carried out teh development directly. A company would also mean additional complexity and administration/compliance costs, all of which should be balanced against any potential tax saving.

by **deltaforce1** on Wed Dec 14, 2011 1:06 pm

Section44

Do you have any personal experience with tax planning for property development?

I was under the impression that the first few developments are taxed under CGT as it is not yet a trade, and thereafter it is considered a trade and therefore is taxed as income.

Good point regarding the balance between retaining business profits or realising profits, that's given me something to think about. it's all very confusing.

by **section 44** on Wed Dec 14, 2011 1:23 pm

deltaforce1 wrote:Do you have any personal experience with tax planning for property development?

I do.

deltaforce1 wrote:I was under the impression that the first few developments are taxed under CGT as it is not yet a trade

I'm not sure what gave you that impression. In any event, if you acquire or develop land with a view to realising a profit then that's potentially caught by the anti-avoidance transaction in land provisions which would mean that it is taxable as income rather than gains even if it isn't a trade (although it sounds like it would be a trade from the start).

by **deltaforce1** on Wed Dec 14, 2011 2:43 pm

Section 44,

Are there any circumstances where the realised profits from a development are taxed as CGT?

by **section 44** on Wed Dec 14, 2011 3:11 pm

Yes there are. For example, if the development is not a trade and is on land forming part of the garden of your home.

by **deltaforce1** on Wed Dec 14, 2011 3:59 pm

Can you direct me to the article that defines a trade development and defines a development liable to CGT

by **section 44** on Wed Dec 14, 2011 4:03 pm

The legislation doesn't define what is, and what is not, a trade. Case law has developed a series of factors to consider known as the badges of trade. The following (and subsequent pages) from HMRC manuals summarises HMRC's view of the badges of trade:

http://www.hmrc.gov.uk/manuals/bimmanual/BIM20200.htm

What you propose sounds like a trade.