Property:
Developing and investing in property
There is a distinction between developing and investing in property. For tax purposes, profits on development are taxed as income, income from investment is also taxed as income, but capital gains on investment property are taxed as capital gains. These distinctions can significantly affect the amount of tax you pay. There are also subtle, but important, differences between the way development profits and investment gains are calculated.
Development
Property development is taxed as a trade and is subject to income tax and national insurance contributions. If you intend to carry out a series of transactions, perhaps reinvesting the profits on one development into the next one, you may be better off carrying on the trade through a limited company. Cassons can explain how the differing tax treatments will affect you and help you make the best choice.The VAT treatment of property is particularly complex. It is possible that you could reclaim all your VAT, or that you could be charged VAT at a rate of either 5% or 17.5%. It all depends on the details of the property and your intended development work. You should take expert advice before starting any property development.
Investment
When you invest in property, your rental income (after deduction of allowable expenditure) is subject to income tax. If you sell an investment property, any gain is subject to capital gains tax. Capital gains tax is generally lower than income tax. The tax will be less if you have owned the property longer than three years. It may also be less if the property has been let to certain types of business tenant. This is a surprisingly complex area of tax planning.Alternatively, you may choose to invest in property through a limited company. If you are a higher rate income tax payer, the corporation tax on the income will be less than the income tax you would have paid personally. Any capital gain on selling an investment property is subject to corporation tax. The tax may be more or less than the capital gains tax you would have paid had you owned the property personally. If you wish to withdraw income or gains from the company, you will probably face a personal tax bill. Tax planning requires a view of the future: what type of properties will you buy; who will be the tenants; how long will you hold them; will you reinvest any income or gains; will you withdraw any income or gains, and when; and will you eventually sell or break up the company, and when? It is difficult to plan for property investment; and any planning needs to be kept under regular review.
If you are uncomfortable with direct investment in property (or if it is beyond your resources), perhaps you should consider the many ways apart from direct ownership that you can invest in property.
Through various collective ownership structures you can invest in a property fund which is professionally managed and spreads risk by having a broad portfolio of properties. You can invest in types of property that most private investors would not even consider. Among the possibilities are:
- Prestigious commercial property such as a city centre office block with the Government as a tenant.
- Student residences, with near 100% occupation levels.
- Ground rents, very stable and low risk.
There are some types of property investment with special tax privileges, such as:
- Commercial property in an enterprise zone, with tax relief on your investment.
- Woodlands, with tax free income and growth, and relief from inheritance tax.
- Pubs, a risk investment but with a very high property content, with the possibility of tax relief on your investment, and capital gains tax and inheritance tax privileges.
Property should normally form part of a balanced investment portfolio. You should always take professional advice, to be sure that you see the full picture and choose the best investment strategy for you.
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