Taxes! CIL, CGT, VAT

[Antz99]

Very much a newbie, so please go easy on me!

I currently own the ground floor flat of an end of terrace property in London. The upstairs flat is owned by a friend of mine. Together we own the freehold on the land. We are about to undertake a personal development project, to extend the terrace and build 2 new 2 bed properties on our existing land. We will then either rent these properties out or sell them for profit - whilst continuing to hold on to our existing properties.

 

From a tax and finance perspective, I have a few questions;

- Would setting up a LTD company be beneficial?

- If so, if we were to be VAT registered, I understand we could claim back any VAT for architecture and professional services fees? 

- Though if we were to do so, would we be obliged to charging VAT if we sold the property to an individual?

- Does anyone have any recommendations on the best way to reduce CIL, VAT, CGT? 

 

Many thanks,

Ant

 

 

[Mr Punter]

Hello @Antz99 and welcome.

 

If you sell the plots to others you can take the money free of any tax.  This is 100% the course I would recommend unless you have lots of experience and funding.

 

If you choose to build yourself or get others to do this for you, you will be a developer and tax will be due on the profit.

 

Setting up a limited company, bank accounts, registering for VAT, CIS, obtaining appropriate insurances etc is a big undertaking and requires a large amount of paperwork.

 

In any event, there is no VAT on new build.

[Antz99]

Thanks @Mr Punter,

 

We fortunately have finance in place - and because we will continue to hold onto the existing properties, we wanted to try and keep hold of as much control as possible. 

I also believe that whilst there is greater risk, there's obviously greater reward if we were to develop ourselves - plus also provides us the option of holding on to the new builds and renting - is our financial position allows us to. 

 

Do you have any guidance on setting up the limited company etc? Would you recommend speaking to a professional organisation?
Thank you,

Ant

 

[Mr Punter]

Off the shelf ltd company is quick and easy to do.  If you VAT register you can reclaim all your VAT.  You will need professional advice from an accountant.

 

If you intend to let, you may need 2 companies, one to develop and one to let, as you may otherwise be unable to reclaim the VAT.  Company A would hold the property and get Company B to design and build.  Company B is VAT registered and can reclaim.  They hand over finished property to Company A, who let it out.  Ltd cos can be setup online v. quickly and cheaply.

 

You would be best getting an architect to do a full design to include planning consent, building regs and full construction and tender information.  You need someone who is used to doing this and deals with contractors in your area.  Get a full turnkey build or you will have potential nightmares.  You may also need a contract manager part time.

 

You could also consider a design and build where a contractor undertakes on a fixed price to construct  the housing to a specified standard, achieving specified performances and the rest is up to them.

 

Bear in mind that you may not make much more doing this than you would if you just sold up to a developer.

[SimonD]

Seconding what @Mr Punter says, setting up a LTD company is really very simple, you can do it online during a coffee break.

 

Structuring and running a company or companies successfully is an entirely different matter and something I'd recommend you always get advice on before taking the plunge, especially since your project involves your respective (multi-party) individual assets and their development. For example, you need someone to provide the grim but valuable advice about how to extract yourself should your friendship deteriorate and other such realities etc. I don't mean to sound negative but I've spent nearly 10years working with start up companies and entrepreneurs so learnt much about how things can shift from lucrative dream to unworkable dynamics, not to mention the challenges of setting up good financial structure and management.

 

 

[newhome]

Can’t comment on the Ltd company position but there is no way of avoiding CIL unless you are a self builder and you live in the flat for 3 years post completion. So you could consider moving into the new flat and renting out the old one to get round that and your neighbour would need to do the same. And you would need to be very careful to follow the CIL exemption process to the letter. 

[newhome]

1 hour ago, Mr Punter said:

In any event, there is no VAT on new build.

If you don’t have a Ltd company there are things that a self builder has to pay VAT on, such as architect and structural engineer fees that a Ltd company can avoid. The reclaim scheme is supposed to put a self builder in the same position as a commercial builder but it really doesn’t.
 

Plus if it’s not a self build, eg built to let out as in this case, you can’t reclaim VAT via the reclaim scheme so to avoid any VAT all work must be done by a VAT registered builder on a supply & fit basis. 

[Mr Punter]

1 minute ago, newhome said:

If you don’t have a Ltd company there are things that a self builder has to pay VAT on, such as architect and structural engineer fees that a Ltd company can avoid. The reclaim scheme is supposed to put a self builder in the same position as a commercial builder but it really doesn’t.
 

Plus if it’s not a self build, eg built to let out as in this case, you can’t reclaim VAT via the reclaim scheme so to avoid any VAT all work must be done by a VAT registered builder on a supply & fit basis. 

 

Sorry I should have said on the sale of new build properties.  I was answering their point of

 

2 hours ago, Antz99 said:

Though if we were to do so, would we be obliged to charging VAT if we sold the property to an individual?

 

[newhome]

13 minutes ago, Mr Punter said:

Sorry I should have said on the sale of new build properties.  I was answering their point of

Ah sorry I misread what you meant ?

[Faz]

I would have thought you also need to look at the tax position carefully. With a Limited company it will be liable for corporation tax on any profits (19%) and then you will be liable for personal tax on any dividends (up to 38% - this all totals to about 50%).

 

Building services will be zero rated for VAT but VAT will be chargeable by suppliers and this really does add up if cashflow is a potential problem.

 

An LLP is another route to investigate where the company is effectively neutral for tax purposes and profits will be taxed according to your personal status.  LLP's can be VAT registered.

 

As with all such things, everyone's circumstances are individual so proper advice from an accountant  is best taken up front.

[Bitpipe]

I have a Ltd co for my day job, I pay about £250 to an accountant each month for services  - this includes stuff like payroll, invoicing and the like so probably not relevant to your enterprise. However tax is a minefield.

 

Understand your desire to retain control but if profit is your aim, getting planning is the biggest value add.

 

Thereafter you're as likely to make money or loose money on the build itself as margins on that are notoriously slim.

 

If you're using a main contractor then they will want a 20% margin on their spend as that's their business.

 

If you're project managing then you 'save' the 20% but risk is  inexperience consumes that buffer.

 

Developers make money by land banking and then getting planning for selected plots. They then value engineer the resultant dwellings (spec and density) and despite the marketing, find the cheapest way possible to erect them which results in *very* variable quality (I'm being charitable).

 

If you're aiming for a high quality spec and finish then expect that to eat into your overall margin.

 

 

[Temp]

Be careful.. If you build to rent them out i don't think you can reclaim the VAT.

 

https://www.macfarlanes.com/what-we-think/in-depth/2017/build-to-rent-vat-issues/#:~:text=Typically a residential developer will,purchase price for the site.

 

The position is more complicated for developers who are building to rent. The grant of short leases to tenants are not zero-rated and will not entitle the developer to recover VAT on development costs.

 

 

[Temp]

Your best bet would be to build the new place for yourself and move in tor at least 3 years. Rent out your current property.

 

CIL - None as self builders are exempt.

VAT - reclaimed on materials, not paid at all on labour. Standard rated on architect.

CGT - Probably none if you sell your current property as for most of the time its been your Principle Private Residence. 

 

Remember to make a will as IHT could be significant.

 

 

 

[Antz99]

Thanks everyone - this is super helpful.

 

There is also an option of knocking down the existing building and re-building from scratch, including basements. From what we understand the cost of underpinning the existing building will be significant - and it may be cheaper to just knock down the existing (which is currently two old awkwardly shaped flats), potentially retain the facade, and then start afresh, therefore not requiring the same out of underpinning (cost and time). 

 

That said, having spoken to a number of accountants yesterday;

1. existing lenders would expect to be paid back before that could happen. 

2. If we then transferred into a limited company, we would have to realise gains thus paying CGT

3. Transferring into a Limited company we would have to pay Stamp Duty

 

Though this would then mean the whole works would be 0% VAT, as it's complete new builds. Therefore if the increase in value of existing plus VAT savings is greater than the CGT plus additional stamp duty, then it might well be worth it. 

 

The architect we're about to appoint has significant experience in projects similar, so we're aiming on leaning on them a fair bit - but it's the taxation and charges side which as most of you have said is a minefield!!
Quickly realising that the profits that we were hoping for, are certainly not likely - @Temp / @newhome especially given that neither my friend / business partner live in the existing property  (both rented out) - and we would have no desire to move into the new builds either - especially for 3 years!

I think for ease of lending/borrowing it would be better for us to assume that we will build and then immediately sell. 

 

@Mr Punter - to your point on being VAT registered - we've been advised by one accountant that if we were to VAT register then we would have to charge VAT on the final sale of the property if it goes to an individual? Is this not the case?

 

Ideally I think we just need to find an accountant who can handle (and understands) all the taxes and fees that may be payable (incl. CGT, VAT, CIL) - who can then look at all the different building options and advise financially where we will be better off;

ie. 

1. Building just to the side (and basement)

2. Knocking down existing building - and developing whole plot

 

This is hugely insightful, and a great learning - thank you everyone, so far!

 

[Mr Punter]

13 minutes ago, Antz99 said:

@Mr Punter - to your point on being VAT registered - we've been advised by one accountant that if we were to VAT register then we would have to charge VAT on the final sale of the property if it goes to an individual? Is this not the case?

 

No.  Get a new accountant.  VAT is not chargeable on the supply of new build housing.

[Jilly]

23 hours ago, Mr Punter said:

 

If you sell the plots to others you can take the money free of any tax.  This is 100% the course I would recommend unless you have lots of experience and funding.

 

 

 

Apologies, I think this is incorrect. 

[Mr Punter]

15 minutes ago, Jilly said:

 

Apologies, I think this is incorrect. 

 

No need to apologise but I am interested in knowing your reasoning?

 

I thought this would be regarded as their garden, and they would get PPR relief.  I could be mistaken but it has been the case where I have bought garden plots from others.

[Temp]

+1 Should be tax free.

 

It can be hard for a novice builder to make money actually building a house. Dont always believe the figures they quote on Grand Designs. You might make most of the money just getting PP and selling it to a developer. You could add covenants precluding them constructing a basement if you want or giving you a share of the profit if they reapply for a different/larger building.

[newhome]

56 minutes ago, Mr Punter said:

 

I thought this would be regarded as their garden, and they would get PPR relief.  I could be mistaken but it has been the case where I have bought garden plots from others.

It wasn’t esplained in the initial post but later the OP has explained that it’s not their PPR. 

 

[SimonD]

6 hours ago, Antz99 said:

I think for ease of lending/borrowing it would be better for us to assume that we will build and then immediately sell.

 

If this is the case, you need to go beyond the mere plan for build costs/profits and associated taxes, but also, if this is a one off development,  how you go about extracting the assets from the company and winding that company up. This is not trivial as you may end up having to settle VAT, CGT and corporation tax as well as individual taxes on your earnings from that company. There are of course strategies for this but extracting assets from the ltd does require careful planning too.

 

What you really need is help putting together a business plan that takes all this into consideration and therefore gives you not only a financially sensible build strategy but an overall company strategy that covers where you want to take it, which may not necessarily be a ltd company.

[Antz99]

19 hours ago, SimonD said:

What you really need is help putting together a business plan that takes all this into consideration and therefore gives you not only a financially sensible build strategy but an overall company strategy that covers where you want to take it, which may not necessarily be a ltd company.

 

Thanks @SimonD - I agree.
Can you provide any guidance on our best route for this / or whom to speak with? Is it an accountant? It is a developer? I appreciate that we will likely have to pay for this.

 

Thank you

[SimonD]

1 hour ago, Antz99 said:

 

Thanks @SimonD - I agree.
Can you provide any guidance on our best route for this / or whom to speak with? Is it an accountant? It is a developer? I appreciate that we will likely have to pay for this.

 

Thank you

 

No problem,of course. It's best to speak to an accountant in the first instance, but it doesn't harm if you know any developers that you can speak to about how they run their business.

 

In order to find and contract an accountant with the right experience, and to gain initial insight on answers, I've previously used the Any Answers section of AccountingWeb. You can either search up existing answers relating to companies involved in property development and see who's posting the good answers, or just write your question with a note that you're looking for an accountant to help. I've had some good response previously that helped an organisation I was working with through some tricky and vague tax law and I didn't know anyone locally with the expertise.

 

 

[Mr Punter]

To provide an opinion on what may be the best route you would need to give facts and figures.  You need an approximate build cost and sale value on the new properties.  If you estimate the fully inclusive build cost at £2,750 per m2 plus extra over (£50k?) for e.g underpinning it will give you a start point.  For sale values, these should be in line per m2 with those in your area.  Deduct the build cost from the sale value and that will give an approximate profit.

 

Assuming you are able to create a couple of 90m2 houses, total build cost £545,000.  Your sale prices could range between £300,000 and £1,500,000 each.  Perhaps they would value at £450,000 each, so £900,000.  From the £355,000 you would need to deduct CIL, sale costs (if you choose to sell) and any other taxes that apply.  A developer might offer £220,000 for the site with planning or option.

 

Whether you are a partnership, ltd co or LLP, if you don't intend to sell, CGT will not be an issue and VAT will not be charged in full if you use a main contractor.  CIL will be charged whatever.