Changes in how investment property is taxed have thrown into relief property development as an alternative wealth creation strategy; but as with owning investment property, structure is everything if one is to maximise returns whilst minimising tax.
Looking at that in more detail, one of the most effective development and tax planning strategies is to use a separate company for each property development, albeit there’s nothing to stop the shares being held in what is known as a ‘Holding Company’ which you and your fellow shareholders own outright.
So why is using separate companies better than the apparent simplicity of just using the one?
If, for example, the same company owned each new development then in order to sell that development the whole business would have to be sold which could well crystallise a full capital gains tax (CGT) charge or end up being treated as trading income for tax purposes. Likewise, the shareholders would also be personally liable to income tax on profit extraction.
The main advantage of using separate companies for each individual development is that on the disposal of the shares the holding company could qualify for CGT exemption and the shareholders would potentially benefit from entrepreneurs relief, which allows a 10% tax rate on capital gains as opposed to the more usual 28%, albeit there is a lifetime limit of £10m. The individual shareholders would still be subject to income tax on the cash extraction, but the holding company would be able to mitigate corporation tax on any capital gain.
Another advantage of using different companies for different developments is that it’s easier to bring in investors who would simply receive share capital in the new business making it easier for them to take their share of the profits without having to sell the entire property development business.
Asset protection is yet another reason to opt for a holding company/subsidiary structure, in that by keeping the developments separate the risk of one development being held liable for the debts of another is significantly reduced. Likewise, as the companies would all form a group for tax purposes they could each surrender losses and transfer capital gains within the group free of tax.
Are there any disadvantages using this type of structure?
The main one is that it will increase the number of companies for associated companies purposes, i.e. those which are under common control, which could effect the corporation tax bands. Likewise, each company will have to submit its own returns and incur additional accountancy costs.
Lastly, whatever you do, don’t try to do it yourself – whether individually or company owned, running a successful property business is a team sport and your accountant, financial adviser (mortgage broker) and someone like us will all need to work together to get you the best result, albeit nothing’s cast in stone and the trick to staying on top of the game is to effect change whenever it’s needed.
This fact sheet is based on our understanding of current taxation, legislation and HM Revenue & Customs practice as at January 2016, all of which are liable to change without notice. The impact of taxation (and any tax reliefs) will depend upon your individual circumstances and you should not take action without first taking professional advice.