Tax Tips for Property Developers

Tax Tips for Property Developers

I meet a lot of property developers – from the novice, first timer through to the experienced, corporate developer.  And whilst the questions change as developers become more experienced, there are some common themes that crop up time and again so I thought it might be useful to share a few of these. 

Unfortunately, the other thing I have learned is that no two developments are ever exactly alike.  That means there is no substitute for getting the right advice before commencing any property development.  There’s nothing more frustrating for advisers than finding out too late that we could have had a really positive impact or helped navigate some catastrophic pitfall if only we had known what was going on!

Anyway, as promised here a few of the most frequently discussed issues:

Structure

This is almost invariably the very first question.  And whilst for all sorts of good tax and commercial reasons the decision is almost always these days to use a limited company, but even then there are exceptions.  The questions that need asking are:

  • What is currently on the land? Is it all or part of a current residence of the developer? Are the current buildings being demolished or converted?
  • What is being developed? Is it residential or commercial property or a mix of both? Is there a social housing element?
  • What will it be used for? Will it be rented? Will it be sold off? A mix of both?  Or more frequently these days, is there some uncertainty at the planning stage as to the final decision?  Sometimes it may even be built for the developer’s own use either as a residence or an office?
  • What are the expected levels of profits?  Will they materialise in the form of gains on the development itself or ongoing income? Over what time period will they arise?
  • What type of and how much financing is being used?  Will there be a re-finance at some later stage?  How much developer equity is being injected?

All of these questions have implications for the structuring decisions.  The implications are often wide ranging – sometimes it will be about tax minimisation or mitigation.  Other times there will be pitfalls to be navigated or asset protection will be the main consideration.  Occasionally the questions will give rise to potentially competing decisions and at those times it is more important than ever to understand the issues and receive clear advice.

VAT

This often overlaps with the structuring decision – there are occasions when VAT issues will be part of the overall picture around structure.  Regardless of that however there are almost no developments where VAT does not play a role and advice becomes important.

Some of the key questions are often:

  • Is VAT being charged by the property vendor to the developer?  Can this be avoided or if not, reclaimed by the developer?
  • What, if any, VAT will be payable to builders, professionals and other key suppliers?
  • Of this chargeable VAT, how much, if any, can be recovered from HMRC?
  • Is it possible to make changes to improve VAT recovery rates?
  • What, if any, VAT will be chargeable either on the sale of any property or on rent charged to eventual tenants?
  • What ongoing VAT issues will arise from the eventual use of the developed property?

Other taxes

These often also play a key role in the structuring decision but standalone tax related questions again remain regardless:

  • What income taxes will be due on profits?
  • Is capital gains tax relevant?
  • Will the Annual Tax on Enveloped Dwellings (ATED) be payable? Or more likely will it be necessary to claim exemption from ATED?
  • What if any, stamp duty land tax (SDLT) will be payable and can it be reduced or mitigated somehow?
  • What will resulting profits or assets mean for the estate and any future inheritance tax liabilities for the developer?

As you can see there are a number of overlapping, often complex issues that arise for property developers.  If you do wish to discuss any plans please feel free to make contact.

Article by
Barry Soraff
020 3146 1603
Partner and Property sector expert.

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