What is property development?
Property development is a business process. It encompasses activities ranging from renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others.
What are the issues?
There is a wide range of tax issues to consider when developing properties.
Here we touch on just a few of them:
– Your own home is normally free of capital gains tax when you sell it, but this tax exemption does not apply if you purchase a property with the intention of developing it, and turning a profit. In this case, the profit you make could be subject to income tax (at rates of up to 50%) rather than capital gains tax (18% or 28%), as the Taxman will want to view the development activity as a trade. It is very rare that the Taxman succeeds in proving the development of a single property as a trade. If you make a habit of developing and selling on properties while claiming capital gains exemption; you could lay yourself open to a tax investigation.
– The profit attributing to the land in excess of half a hectare will normally be subject to capital gains tax. The half-hectare limit can be stretched where the land and any accompanying outbuildings are closely related to the main residential building.
– When purchasing a run-down property to develop you must think about the cost of VAT. If you are a builder holding no VAT registration, you normally can’t reclaim the VAT on the development costs. There’s a scheme that allows DIY builders to reclaim VAT when a non-residential building is converting into a home. There are a number of other conditions that must be fulfilled for this DIY builder scheme to apply.
– VAT may be charged at the lower rate of 5% on certain building services when the building has been empty for at least two years, or the development changes the number of dwellings in the building. The rules that allow this lower rate of VAT to apply are very complicated so you need to take advice before you start the development project.
If you are looking at property development it is important to get advice before proceeding.