Property development

Property development is a hybrid term that can apply to buy to let or buy to sell property businesses.

Buy to let landlords will often buy and refurbish a property prior to letting – especially if the intention is to let as a shared home or house in multiple occupation (HMO).

Buy to sell speculators will buy, refurbish and sell with a view to making a profit

For tax purposes a property development business is a buy to sell business, which means income tax is paid on any profits on a sale – not capital gains tax.

Special rules for buy to sell expenses

A buy to sell business has two sets of expenses – general business costs, like phone, postage and travel, and costs relating specifically to buying and selling property.

Buy to sell accounts should reflect this – with specific spending on each property allocated to a separate cost centre.

For instance, a buy to sell trader buys Property A and Property B. The buying costs for each are £5,000 – so £5,000 goes to cost centre A and £5,000 to cost centre B. Then, £3,000 is spent on Property A and £7,000 on Property B, each allocated to their cost centres.

Property A is bought and sold in the same trading period, so the profit and costs are included in the trading accounts – but Property B is still under development at the end of the tax year.

All the costs relating to Property B are held as work-in-progress (WIP) on the balance sheet and are not included in the trading accounts until the trading period when the property is sold.

Buy to sell benefits

Aborted property costs, like valuations and legal fees, on property transactions that fall through are allowed in the trading accounts for a buy to sell business.

Business owners can also draw a salary rather than face income tax on all the profits made in the year, unlike a buy to let business.

Buy to sell tax manipulation

Many buy to sell business owners trade as a limited company rather than a sole trader or partnership.

Although running a company generally costs more to administrate, corporate status allows more tax manipulation.

For instance, directors and shareholders can keep their drawings below the higher rate tax threshold (40%) while keeping any profits in the company bank account.

No further income tax is paid on dividends below a shareholder’s 40%  income tax limit – the company already foots the bill through corporation tax.


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