Self-Employed Property Developer/Landlord

Pete12

Hi,

A builder is intending to purchase properties to develop and sell. If, after refurbishment, a property is difficult to sell and the builder lets it - pending sale - what is his tax position?

I assume on the one hand he is engaged in a trade (builder/developer) and the property effectively "stock" but if he lets a refurbished property is the property an investment and the refurbishment costs disallowed expenses against rental income?

Any thoughts would be much appreciated.

Pete12

deanshepherd

Tricky one.

If the letting is expected to be temporary then the letting income can be treated as trading income and all costs allowable as usual (albeit tied up in stock until sold).

If the builder takes the decision that the property is not going to be put back on the market for some time then you have an appropriation of trading stock to fixed assets at market value to deal with. Not great as the builder will pay tax on a profit he has not yet realised.

T.C.

The property which is bought, refurbished and sold is a simply trading expense and, for tax purposes, is trading income.

If the property is brough, refurbished and then let out for some months/years, it becomes an investment property and liable to capital gains.

deanshepherd

If only it was that black and white..

Pete12

Dean,

I thought I had posted a reply but it seems to have got lost somewhere - so I'll re-submit...

Let's see if I understand you by considering the wider spectrum:

1) If the builder lets the unsellable refurbished property then he is still a builder and the property is subject to all the tax considerations pertaining to trading stock. The fact he is letting the property is incidental to his main business and so ignored - it continues to be part of his normal activities. Do you know how long he could let the property for before tipping into another category (2 & 3)?

2) If the builder let the property for a prolonged period it would become an income generating fixed asset doing so at whatever the market value was at the time. It is this unrealised gain you are referring to. Presumably he could still claim trading expenses for this - now - fixed asset?

3) If the builder (sole trader) does not sell the property but keeps letting it, it ceases to be a business asset/stock and therefore does not qualify for business expenses treatment - becoming a personal asset - ie it leaves the "business" at the market value at the time in the form of drawings? Is any of the tax allowable expenditure previously claimed (when the property was stock/a business asset clawed back?

All opinions are welcome!

Pete12

If you haven't already guessed - I'm new to the MiP game!

deanshepherd

1) I have seen cases, particularly in a downturn in the property market, where the builder simply cannot shift the property without taking a big hit and therefore rents it out for quite some time. The property never comes off the market, it is just really struggling to sell. In that case, the intention is always to sell at the right price and it can stay in stock. The rental income is therefore treated as trading income.

If the builder decides it's not going to happen any time soon and instructs his agent to take it off the market and lets it instead then that may be the point at which it becomes an investment property.

Each case will be looked at on its merits but essentially when you have taken the decision no longer to market the property then that is probably when you have to think about transferring it to the balance sheet.

2) Yes, effectively you have sold it to yourself at market value. Whatever profit you would have made on a 3rd party sale will therefore show in your accounts including a deduction for all the expenses.

3) Is this not exactly the same scenario as number 2?

Pete12

Dean,

3) is not meant to be the same as 2) (but is it?). In 2) the asset belongs to the business (sole trader) inasmuch as, although it is not stock, it still does something in the business and is subject to business accounting and tax treatment. I was under the impression that if the property were held just as an investment - it was not part of the builder's business and would need to revert to a private possession of the sole trader as an individual - that is - it would be removed from the balance sheet, presumably by way of drawings, hence 3). Perhaps this is too simplistic...

comments please!

Pete12

T.C.

You could just hold this on the Balance Sheet as part of the business. (purchase cost, plus refurbishment and other costs) Then when it is sold it would be brought back to the P & L and sold as part of the trading business. Or, if kept as an investment property for sometime, taken from the Balance Sheet and sold subject to CGT. Are think you are complicating this one too much.
I carry out the accounts for a partnership which has a building business and a property investment business. Everything is kept together until such time as a property is sold.

Pete12

T.C.,

Possibly I am complicating matters.

In fact this is getting to the very crux of the matter and touches on an earlier question I posed; in the case of the partnership you mention - everything being kept together - does this mean that profits and losses of the building business and property investment business are treated as those of one business - that there is no distinction between the two streams of income - that the losses of one side can be used to offset those of the other? Or is it that types of income (however they are held - by an individual, "within" a business or by a Ltd company) are sometimes given different tax treatments?

Pete12

T.C.

It is one business - a partnership and not limited. However, the trading profits and losses are taxable under income tax rules and the sale of investment properties is subject to capital gains tax through the partners' individual tax returns. Everything is kept in the same set of accounts and only split for tax purposes as and when necessary. It gives a clearer view of the business as a whole. Hope that helps.

deanshepherd

^Agreed. For sole-traders and partnerships you can do what you like accounting presentation wise. Keep them on the balance sheet or remove them, HMRC don't care. They just want the correct treatment applied under the correct tax rules.

I would go with TC and keep everything on the business balance sheet as that is how the client will usually want to see it.

Pete12

T.C., Dean,

Agreed then. Thanks chaps!

Pete12