When to claim expenses for a property development business

by **Dixon** on Thu Jul 28, 2011 12:22 pm

Could somebody please clarify the rules regarding which expenses should be claimed (for self assessment purposes)in the tax year they are incurred and which should be carried over and claimed when a property (trading stock?) is actually sold?

I have been running a small sole trader property development business for the past few years, alongside another unrelated sole trader business.

I have just sold a property (under huge pressure from the bank who provided the business loan to buy the property) and made a very big loss.

I have always thought that any expenses relating to the property, which in my case have been incurred over a number of tax years, could not be claimed until the property is actually sold, but after speaking to a lady at Taxaid, I am now not so sure that this is the case.

Expenses such as utility bills, council tax, loan interest payments, loan renewal fees, buildings insurance, travel costs etc have all been incurred on an ongoing regular basis, alongside materials and labour costs for actual work on the property. So far none have thses costs have been claimed.

Thanks in advance, your help is greatly appreciated.

by **Incredulum** on Thu Jul 28, 2011 6:02 pm

Deja vu.

I would be with your analysis in that pretty much all these costs are capitalised into stock as they are incurred.

HOWEVER, you can write down the value of your stock at the end of each year to net realisable value.

So, value at start of year £100,000. Costs of construction during year £20,000, therefore value of stock at end of year (before write downs) £120,000. However, you consider that you would get £110,000 and the estate agent would charge you £3,000 so the net realisable value of the property is only £107,000 so you have made a 13k loss in the year.

And if you have other income then your annual trading losses can be offset against it - but not any brought or carried forward losses.

by **ptpash** on Thu Jul 28, 2011 10:14 pm

If in the next year the property is worth 120,000 and then in the following year it is sold for 130,000 does that mean
profit in year 2 of 13,000 (ie 120,000 less 107,000) and in year 3 profit of 10,000 ?

by **Incredulum** on Fri Jul 29, 2011 9:41 am

Yes, you are correct. Here is another example.

Stock is stated at the lower of cost and net realisable value.

You buy a property for 80k which you treat as stock as you are a developer.

During year 1 you spend 20k on it. Cost of stock at year end 100k, and you think it would sell for that much, so valued at 100k.

During year 2 you spend another 20k on it. Unfortunately the market crashes during the year, so cost at year end is 120k, value is 107k. i.e. you make a 13k loss in the year.

During year 3 the market recovers and you spend nothing on it. Cost at year end is 120k. Market value is 115k. However it is to be stated at the lower of cost and net realisable value. Cost is 120k, but value is only 115k (compared to 107k in prior year) so you make a 8k profit during the year, by writing back some of the prior year's write down.

During year 4 you spend a further 10k on it. And you sell it for 150k. Total book value is 115k brought forward, plus 10k spent on it during year = 125k. Therefore profit in year is £25k.

by **Dixon** on Fri Jul 29, 2011 3:02 pm

Thanks for your replies and thanks for a fantastic worked example with figures and different scenarios included.

This really makes things clearer, though unfortunately in my case the market never recovered!! And of course I never obtained formal valuations at the start/end of each tax year concerned.

In the absence of any formal valuations having been done at the start/end of each tax year, how in your opinions would HMRC be likely to view my (yet to be) prudently self-calculated valuations/NRV's?

by **Incredulum** on Fri Jul 29, 2011 3:38 pm

You really need a surveyor. In the absence of one, then you could always use some average prices. But remember if HMRC think you have been negligent in your valuations then you may pay penalties.

by **Dixon** on Fri Jul 29, 2011 4:33 pm

Thanks once again, obtaining retropective valuations from a surveyor for the past three years is probably not an option for me.

I will probably have to use a combination of factors such as estate agents valuations, condition of the property, property market conditions, general economic conditions, the credit crunch, threat of repossession from the bank (yes one of those that was bailed out by us all) etc to arrive at some sensible figures covering the three year timeline.