Build two (get one free!)

[Red Kite]

Hi, we have just obtained Planning Permission for 2 houses and were looking to build both simultaneously and sell one and live in the other. As this is somewhat unusual we thought others might like to know what we discovered when we did some research and we talked in general terms to our accountant. Obviously it depends on individual circumstances and the following does not constitute any form of advice - and there may be other ways to look at it and we are no experts and we haven't investigated the details fully yet.

 

CIL - if you self build and live in the house for 3 years you can (if you get the paperwork right) be treated as exempt from CIL. If you build two then you are a developer and CIL is payable. If you are demolishing then you can subtract the GIA of the old building from the total new build GIA to reduce the bill. You MAY be able to negotiate which new build house gets its CIL gets reduced.

 

VAT - if you self build then you are exempt (either at point of purchase or in a retrospective reclaim) from much of the VAT. If you build 2 or more no such rules apply so you would need to be VAT registered to reclaim the VAT. VAT is likely the largest single tax hit you will take so its important to get this one right. There may be some cashflow benefits from getting vat back during the build rather than waiting to do a reclaim - but offset is the 'pain' of vat registration. Not sure but you may be able to reclaim the vat paid on 'services' etc. which you can't as a self builder.

 

CGT / IT - this is where it gets tricky - if you self build one house and live in it for an (unspecified) period of time as you primary residence then when you sell you are usually exempt from CGT on any gain. If you build 2 or more then you are a developer and its very likely that any profit you make will be subject to Income Tax at your marginal rate. It seems rules have changed here as CGT might have applied to this case its not often true any more. It seems that much of the interpretation of this depends on your 'intent' - is your plan to build 2 and sell 1 as a developer? If so this is viewed as your occupation and profits are taxed as income not capital gains. There 'may' be some scope to develop the first house, live in it, establish it as your primary residence, then build the 2nd, sell the 1st, and move into the 2nd as your primary residence i.e. two sequential self builds. However you need to be very careful that your 'intent' was not to act as a developer! In our case the fact that our PP is for two houses from the start is a bit of a giveaway - you 'might' get PP for the first house alone and then subsequently (after living in the first house) realise that there is scope for a second house on the plot and subsequently build something more suited to your needs.

 

There may be some scope (say you own the entire plot) to sell a portion of the plot to a development 'vehicle' run by you - perhaps as maybe sole trader, LLP or limited company. You would need to sell the land at 'market value' as this is an obvious area for scrutiny. You 'should' (not actually testing this theory yet so beware) be able to retain the land and build the house you plan to live in as an individual 'self build' exempt from CIL and VAT etc. exactly as any single self build does. You 'should' also be able to develop the 2nd house within the development vehicle as a separate entity and be taxed on that separately for VAT (you would VAT register the vehicle) and IT, Corporation Tax etc. You do have some scope and flexibility to pay yourself as a director / shareholder of the 'vehicle' but this is getting pretty complex pretty fast! For any shared costs you need to be very careful that they are apportioned on a 'fair' basis and not as a deliberate means to reduce the 'profit' on the resale unit.

 

SDLT - if a development 'vehicle' buys the land then it will need to pay Stamp Duty on this but  the rate is less than an individual will pay - need to check this. Also be careful about second home SDLT if you are an individual - again not looked at in detail but there are some rules about reclaiming 2nd home SDLT (if you own one home buy a plot you pay 2nd home SDLT. If you sell the first home within a period of time you can reclaim the 2nd home SDLT)  that may fall apart in the 2 house picture.

 

Funding You also need to give some serious thought to your funding if you build two. Self build (regulated) mortgages do not seem to work for this scenario and you need to start looking at (unregulated) developer finance and this is not a cheap source on money - start thinking 1% per month interest! plus a 2% setup fee! Now you may be able to offset these costs against any profit but its still expensive. It seems that if you can get to 'wind and watertight' before taking on any developer borrowing then the rate drops to only say 0.5% per month (plus setup etc) with 'refurbishment' loans.

 

Construction Industry Scheme & Health and Safety - if you are deemed a developer and building more than one house (and are paying subcontractors) it seems you need to register for CIS and comply with H&S as a developer. Both of these appear pretty onerous and costly. CIS seems to be another of those schemes where you act as an unpaid tax collector and have to submit quarterly returns. Not exactly sure what is involved but it would need some research to make sure you are compliant. 

 

Well that's what we discovered - bottom line is that building two is tricky and we would recommend you take professional advice early on from a tax accountant who understands this stuff (not all accountants will!). You will need to be very CAREFUL in what you do and it seems that some poor decisions early on may bite you later on so BEWARE!

 

And the last caveat - as with all taxation the landscape can change overnight - so even if you have it all mapped out the taxation rules could change and you could be much worse off.

 

There may be others out there who have done something similar and know much more than we do, so we would love to hear sage advice and hard won experience. Though there is a school of thought that you are daft to even consider one self build - you must be totally insane to even think about two!

 

Hope that helps!!!! We will let you know how this pans out as we learn more.

 

[ProDave]

Can you not build one, live in it for a few years, claim all the exemptions and VAT reclaim, then sell that and build No 2.

 

CIS registration is straightforward at least as a subcontractor, I have to be registered for that as a sole trader for the times when I work on a new build and get tax deducted by the main contractor.

[Ferdinand]

A note that if you are doing a corporate structure the topping up the pension is a good way of takeover out money tax free. Again, specialist advice needed.

 

if you are accepting the developer label, then Entrepreneur’s Tax Relief can come in.

 

Ferdinand

[Tony C]

Thank you for your post, it is very useful as I also got PP for 2 house, which one of the house I intend to live in.

Most likely that 2 houses will be build sequentially.

 

CIL - zero on our self build house , there is a CIL chage on the 2nd house. LA confirmed that is fine.

VAT reclaim - Does this mean that I can not claim VAT on self build house?  Oh no!

CGT - I was not aware this too... !

 

 

 

 

[newhome]

41 minutes ago, Red Kite said:

In our case the fact that our PP is for two houses from the start is a bit of a giveaway - you 'might' get PP for the first house alone and then subsequently (after living in the first house) realise that there is scope for a second house on the plot and subsequently build something more suited to your needs.

 

My PP covers 2 houses and when I put my VAT reclaim in HMRC contacted me and asked what my plans were for the other plot. As it happens I didn’t own the other plot as the original plot owner built one house, sold it, split the title and sold me the other plot. I did however ring HMRC to explain (and also to explain something else they queried). The lady was very clear to say that they had to understand intent and implied that serial self builders may be viewed as avoiding tax. If you don’t build the other house straightaway you could perhaps say that currently your plans at present were to sell off the second plot at some point to offset some of the cost of the self build. You could have sold the plot at the start surely anyway. You would need to take advice clearly and probably would not want to build the second house immediately afterwards. You may get challenged if the second house was identical for example. They do seem to be tightening up. 

 

Maybe you should consider whether to sell the second plot as a plot rather than building a house to sell? That could maybe work out better financially. 

[Tony C]

They talk about CGT on self build plus another property here :

https://www.accountingweb.co.uk/any-answers/cgt-on-self-build-plus-another-property

 

It appears to me that selling the plot to your own Ltd company is the standard practice.

 

 

[newhome]

17 minutes ago, Tony C said:

It appears to me that selling the plot to your own Ltd company is the standard practice.

 

I didn’t take that from that thread. It sounded like a few accountants arguing about the tax treatment strategy without a definitive answer. Professional advice is definitely needed. 

[Tony C]

Hi, just called HMRC this morning regard to VAT refund and CGT.

 

Our case description : building two - one for ourselves to live in, the other for rent.

 

HMRC response to VAT refund on self-build - they said it is fine to claim VAT refund on the self-build house, even if two houses are built together.

 

HMRC response to CGT - CGT will be only applied to the house for rent, not applied to self-build house.

 

I am planning to write to HMRC and get response in writing.

 

 

[Temp]

13 hours ago, Tony C said:

Our case description : building two - one for ourselves to live in, the other for rent.

 

Caution. There is a VAT issue if a house is built by a developer and then rented out before it's first sale. Google found...

 

http://www.glovers.co.uk/news-articles307.html

 

Quote

VAT Implications For Developers Letting New Builds

 

VAT incurred by developers in the construction of new properties is recoverable based on a developer’s intended use of the property. When the newly built property is sold or a long lease of over 21 years is granted, it is classed as a zero-rated supply. This allows the developers to recover the VAT incurred in the development costs for such properties prior to any sale or long lease being granted. 

 

Developers choosing to let their newly built properties are for VAT purposes making an exempt supply, under which VAT incurred in the construction cannot be recovered. This is because they are then operating as investors instead of developers. Consequently some of the VAT recovered when the developer intended to sell the property must be repaid.

 

and a possible way to avoid the problem..

 

https://www.macfarlanes.com/what-we-think/in-depth/2017/build-to-rent-vat-issues/

 

Quote

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. Typically a residential developer will not have paid much VAT on the construction costs, because the building of new residential property is itself zero-rated. However a substantial amount of VAT may still be incurred by a developer, particularly where they have had to pay VAT on the purchase price for the site.

In these circumstances it is possible for the developer to recover VAT it has incurred by transferring the site, or granting a long lease of it, to a group entity. This group entity would then grant assured shorthold tenancies of the completed flats to tenants. Provided the transfer to the group entity happens after the foundations are above ground level (this is often referred to as the “Golden Brick” stage) it will qualify for zero-rating and entitle the developer to recover the VAT incurred on site acquisition and most other costs. This type of structuring is commonly used by developer operators in the build-to-rent and student accommodation sectors.

 

Exit

 

Where the structuring set out above has been used by a developer, care needs to be taken to avoid unwanted tax charges arising on an exit. Broadly, if a lease has been granted intra-group and the lease is collapsed within 10 years, this can trigger a “clawback” of some of the VAT recovered on site acquisition and development costs.

 

 

I'm guessing that instead of a group entity you might be able to set up a trust and lend the trust the money needed to buy the house from you. The "sale" to the trust would trigger the zero rating. The trust then rents it out to a tenant(s) and pays you "interest" on the loan you made it to buy the house.  There might be other advantages, for example the trust might be able to offset the loan interest against rental income which you as an individual won't be able to do for much longer (Phasing out by 2020 see... https://www.theguardian.com/money/2017/apr/01/mortgage-tax-relief-cut-doesnt-add-up-buy-to-let-landlords)

 

This is all speculation on my part - you need an experienced accountant.

 

 

Edited February 13, 2019 by Temp
Trying to remove some blank lines

[Temp]

On ‎06‎/‎02‎/‎2019 at 17:49, newhome said:

The lady was very clear to say that they had to understand intent and implied that serial self builders may be viewed as avoiding tax. If you don’t build the other house straightaway you could perhaps say that currently your plans at present were to sell off the second plot at some point to offset some of the cost of the self build.

 

I've seen this issue of intent mentioned several times in this context. Be prepared for HMRC to contact your lender for copies of any paperwork relating to the mortgage. For example if you tell the bank that you will only need some of the money for a few years because you intend to sell the first house then that may come back to bite you later.

 

Its also unlikely to work if the second house is near identical to the first. You really need some sort of reason for moving just 10 yards. I would consider re-applying for planning permission on the second house before building it, perhaps to make it larger as you "intend starting a family etc".

 

Remember you also need to live in the first house for 3 years to avoid the CIL. 

[Oz07]

Interesting on the vat issue. Why a developer can't build to rent and claim vat back yet investor can buy off developer with zero vat and let out. What's that about

[Temp]

Pretty sure its down to the difference between something being "reduced/zero rated" and "vat exempt". I think if something is reduced/zero rated you can deduct input vat but if it's exempt you can't. A sale is zero rated whereas a lease is exempt. 

[bassanclan]

I would suggest that you award the contract for building the houses to your new VAT registered company "Red Kite Ltd". There will be no VAT for you pwrsonally to reclaim as they wont charge you any VAT and Red Kit Ltd will reclaim the VAT quarterly.

 

Distribution of the money from Red Kite Ltd will be taxable, but by the time you've had "expenses" and "Xmas parties" and used your £2000 dividend allowance (per shareholder) you might not have much to distribute. 

 

Would this get around the problem?

[Temp]

If Red Kite rents out the house I don't think they can reclaim the VAT (quarterly or otherwise) because a lease is vat exempt so not eligible for deduction of input vat. My guess is this approach would risk a vat bill later.

[Temp]

I think it works if you contract Red Kite to build it, then sell you the house and you rent it out because the sale to you is zero rated (rather than exempt). But the company might face tax on any profit it makes building the house?

[newhome]

12 hours ago, Temp said:

Caution. There is a VAT issue if a house is built by a developer and then rented out before it's first sale.

 

So what happens if someone in construction is approached by AN Other to do some building work on their new build? Do they need to worry whether the owner intends to live in it, sell it, or rent it out to determine whether zero rating applies? Similarly does that apply to renovations too with reduced VAT of 5%?

 

If the owner says that they intend to live in it but don’t and it is subsequently rented out (HMRC would refuse a VAT reclaim for such a scenario) is it the owner who is liable or the constructor? Presumably the constructor and they would need to persue the owner to recover the VAT? 

 

[Temp]

Don a bit more digging and it looks like the situation _may_ have changed since the web pages I linked to were written.

 

VAT 708 4.3 has this..

4.3 Premiums and rental payments

Where a grant of a major interest is either a long lease or a tenancy agreement, zero rating is restricted to the premium or the first rental payment made in respect of that grant. Subsequent payments are exempt.

The effect of this is that a developer is able to treat as input tax attributable to a taxable supply, the VAT incurred on construction and selling costs. The VAT incurred on ongoing maintenance costs is attributable to the exempt supplies.

Further information on input tax and partial exemption can be found in Notice 706 Partial exemption.

 

That suggests to me there is no problem after all with renting out a new house before sale!

 

Accountant strongly recommended!

 

 

[bassanclan]

The problem with selling the house to a company etc is the 3% additional SDLT tax which you would have to pay on the value.

 

HMRC would not know that Red Kite Ltd has been contracted to build a house as there is no "VAT claim" like when you build your own house

[Oz07]

So @Temp does this mean a company can build to rent while still claiming vat back quarterly during construction? Need a layman's interpretation 

[Temp]

If I've understood correctly yes.

 

Strongly recommend showing the above to an accountant (which I'm not) to get their opinion.