Guide To Property Development: The Tax Situation

Once you have bought, developed and sold a property you should put any celebration on hold until you are certain of the real profit that you have made, the after tax profit.

The Inland Revenue are always interested in the extent to which you have profited from the sale of a property and will be ensuring that they get their share.

There are different types of tax that vary depending on the personal situation of the seller. Because each case is so unique and complicated it is always advisable to seek professional guidance.

However, it is worth having a decent level of understanding of the general situation before you get involved.

The aim of this guide therefore is to give the reader a basic appreciation and understanding of tax issues relating to property investment and development.

Principal Private Residence exemption (PPR)

This is a complete tax relief in that you do not have to pay any tax at all and it applies to people selling their only home and therefore their place of residence.

The property does not have to have been the seller’s only home during ownership but the seller must have occupied the property as their only residence for at least a part of the ownership.

Capital Gains Tax (CGT)

You are liable to pay CGT if the property you are selling is not your place of residence; however you are, as an individual, able to make capital gain a percentage of the profits before you are liable to pay CGT.

Any gain beyond this limit is then charged at different rates (no more though than the top rate of 28%).

Income Tax

Once property development becomes a profession, the developer must pay income tax. The Inland Revenue website is the place to go for further information on what classes you as a property developer.

Property developers with queries as to their level of liability and their expenses allowances should seek the advice of their local Tax Office as each case is unique.

Value Added Tax (VAT)

This is the tax charged on all goods and services within the UK. It includes goods for hire, sale or loan and is usually taxable at 20%.

Certain supplies are taxed at a rate of 5% including power and energy saving materials and construction work on property conversions.

Supplies that are exempt from VAT tend to be necessities and include postage and most forms of insurance.

Profit Calculations

When calculating your profit it can be extremely easy to miss out a minor detail that can have a major effect on your final balance.

Understanding all of the tax issues and loopholes will of course come from experience but the earlier you get to grips with the tax situation the more money you will stand to make, or conversely, the less money you will stand to lose unnecessarily.

Finally, it is always advisable when investing a large sum of money into property that you seek professional advice and search out the most tax efficient routes available to you.

Useful link:

The Inland Revenue Website - www.hmrc.gov.uk