Building 2 houses

[Sydney04]

Hi,

We were granted planning permission to build 2 houses in the rear garden of our house. We have subsequently sold the house and retained the 2 plots.

Through a main contractor we are planning to build 1 house and live in it as our family home (via the self build route).

We are planning for the main contractor to build the other house probably with a view to selling it but we aren't sure of the most tax efficient way to do this and I was hoping that somebody may be able to

If we build outside of a Ltd company structure would I be right in thinking that we would pay income tax on the profit, with the profit being the difference between selling price minus land value minus building costs (including VAT). I'm a higher rate tax payer, my wife a lower rate taxpayer.

We are also vaguely aware that we could build the 2nd house through setting up a limited company, would the profit calculation be roughly the same i.e. Sale price less land value, less build costs at zero rated VAT?

but I almost can't see the point in the company approach as it seems as if the lower corporation Tax advantage over income tax would be negated by dividend tax if we wanted to take the profit out? But I've read today about entrepreneur relief and am thinking this might apply?

Final option would be to build house 2 and rent it out, possibly selling it at a later date in order to buy 2 smaller rentals that might generate a better yield, would this be best done through a company due to lower tax rate on income?

We would want any profit to generate an income rather than spend it as no desire for any big ticket items

cheers

[jerome.lane]

If you develop and sell as individuals, the profit will be subject to income tax at 40%. You could structure it to maximise your wife's basic rate band, but the usefulness of this depends on the gain. A corporate structure pays CT at 19% but you have to extract funds and that means more tax. If there's scope to contribute to pensions, the company get a CT deduction but you'll have to wait until 55 to get 25% tax free and then pay IT on extraction although you would benefit from that money working for you in the pension. You are unlikely to get entrepreneurs relief as you probably own't meet the conditions. A corporate structure for property investment and rental businesses can be tax efficient and sounds like it might work for you.

[Sydney04]

Hi Jerome,

Thanks for your reply, that's really useful

Would I be able to deduct the value of the plot from our profit calculation? (Would this apply to in both individual and Ltd company examples?)

I.e.
Sale price £400k
Build cost £200k
Land value £150k

Paying tax on £50k

And if structured to take advantage of wife's lower IT rate would that apply to the whole profit or just for the amount that takes her income up to the higher rate threshold and then 40% on the rest?

[jerome.lane]

Hi Jerome,

Thanks for your reply, that's really useful

Would I be able to deduct the value of the plot from our profit calculation? (Would this apply to in both individual and Ltd company examples?)

I.e.
Sale price £400k
Build cost £200k
Land value £150k

Paying tax on £50k

And if structured to take advantage of wife's lower IT rate would that apply to the whole profit or just for the amount that takes her income up to the higher rate threshold and then 40% on the rest?

Yes land cost is deductible provided it is the correctly apportioned value for the relevant plot sold.

Profits falling in a higher rate band will be taxed at the higher rate (which can be extended by pension contributions and gift aid payments etc).

You should seek the help of a professional with structuring and tax returns. funnily enough, this is just the sort of thing we do at Stewart & Co!