Are you a property developer? These are the tax secrets you need to know about

An Englishman’s home is his castle, so it’s not surprising that so many of us are interested in getting into property development.

Whether it’s buy-to-sell, buy-to-let, converting existing properties to another use or buying land for a ground-up development, there are options suitable for everyone.

And the good news is that despite the UK housing market taking a hit from Brexit and the Coronavirus pandemic, it’s still a practical long-term investment opportunity, especially since forecasts indicate the market is expected to continue to grow in the coming years.

If you are already a property developer or thinking about it as a viable business option, there are various things you can do to ensure you pay as little tax as possible.

We take a look at some of the most common ways you can save yourself some money and take a look at future legislation which might impact on your property development plans.

Will I save money by buying property through a limited company?

If you are just starting off as a property developer or are reviewing how you operate, it’s worth spending some time working out whether buying property personally or through a limited company would be your best bet.

One of the advantages of buying through a limited company is that you will be able to offset interest costs against the rental/property income. Also, you’ll only pay Corporation Tax (currently 19%) on your profit, rather than being liable for income tax at the higher or additional rates of 40% or 45%. And to minimise your tax liability even further, you can reinvest your income into other properties to reduce the tax on your end-of-year profits.

Deciding which option is best for you can be complicated, but it’s important to get it right if you want to pay as little tax as possible. Why not give our team of experienced accountants a call and they will be happy to talk through your plans and work out your best approach?

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Make sure you understand the different VAT rates

VAT is complicated at the best of times, but VAT in relation to the development of land and buildings is extremely complex and you need to ensure you are paying the right rate to avoid any penalties.

The three VAT rates which can apply to any property development project are as follows:

• Zero-rate VAT: This applies if you are building a new residential development or converting a commercial property, such as a pub into a residential property i.e., flats. In both cases, you’ll be able to claim back the VAT you paid suppliers for the construction work. However, there are certain qualifying conditions you have to meet, so we would always suggest seeking advice from a professional VAT accountant.
• Reduced rate VAT: The reduced rate of VAT at 5% will apply if you are undertaking a residential conversion which will change the number of dwellings i.e., converting a four-bed house into 3 flats, or converting a single occupancy dwelling into a HMO. To qualify for this reduced rate, you need to make sure all the necessary planning consents and building control approvals are in place.
• Standard Rate VAT: If you sell an uncompleted or new commercial building, then the standard rate of VAT at 20% will apply.

Remember, you must hold a valid certificate when claiming for zero-rate or reduced rate VAT. The certificate is issued by HMRC and as experienced local accountants our VAT accounting team will be more than happy to assist you.

The stamp duty holiday won’t last forever

Stamp Duty Land Tax (SDLT) is the tax you pay when you buy a property in England and Northern Ireland and under normal circumstances, if you own more than one property, an additional 3% stamp duty is applied to the conventional bandings.

However, due to the coronavirus pandemic, a SDLT holiday was introduced for these conventional bandings which has also reduced the impact of stamp duty for property developers or Buy-to-Let owners too. And the good news is that the reduction has just been extended until 30 June 2021 for property sales of up to £500,000 reducing to £250,000 until the end of September when it will return to its usual banding level of £125,000.

New tax for UK residential developers in 2022

In February the government announced that a new tax will be introduced on UK residential property developers in 2022. Whilst there isn’t much information about it at the moment, the government’s statement refers to the “largest” property developers paying the tax, which suggests that it will be introducing a tiered tax system.

The tax on developers will specifically go towards removing unsafe cladding in high-rise buildings and is the government’s way of ensuring the industry contributes.

The government will start consulting on the policy shortly, so property developers should keep a look out for full details.

Got any more questions for your Tring tax accountant?

Property development is an exciting field to be involved in but understanding the different tax rules and ensuring you always comply with HMRC can be complex.

As local Tring tax accountants, we provide a whole host of accountancy services to ensure you pay as little tax as possible. From VAT returns to providing advice on how to grow your business, from helping you reduce your Corporation Tax to providing guidance on Capital Gains Tax, we are here to make your life easier.

Please get in touch with our experienced team. We would love to discuss how we can help your property development company thrive and flourish