Property Developer

kuksman

Mr and Mrs are in a Partnership as property developers. Having purchased land late 2002, they started building early 2003 (prior to 5-4-03). They continued building using own labour and some sub contract until July 2004, and the property was sold August 2004.

They completed own Tax Returns to 5-4-04 detailing no income as property not yet completed and sold. They have now considered completing 2005 tax returns only to find that they are well into the 40% tax rate as all income and expenses considered only in 2004-2005. Could they have fill in tax returns in the previous tax years with the work in progress?

Also in this scenario can they claim anything for their labour invested in the property otherwise it would be eaten up by tax.

Ian_W

kuksman wrote: Also in this scenario can they claim anything for their labour invested in the property otherwise it would be eaten up by tax.

Everyone's wages are eaten up by tax!! After deducting legitimate business expenses the profit left is their wages, they apply the tax free allowance like everyone else and the rest is taxed at 10, 22 or 40% depending how much they've earned in that particular tax year. The fact they've done the work themselves doesn't attract any special favours AFAIK, but had they employed someone else it would have been an allowable expense and reduced their profit. Of course, even in the worst case scenario, they get to keep 60% of that profit so doing the work themselves does reward them better than employing someone else.

Can't answer your questions on when they could/should have filled in tax returns but this will bounce your post up and someone else may be able to.

SAP_Saver

effiectivly this would be capital gains tax..see capital gains tax board for further info.

WHA

I don't think this is capital gains tax if as the OP says, they are trading as "property developers" it becomes trading income.

As it is a "trade", I think that there could have been an argument for spreading some of the profits over each tax year, i.e. by valuing the property at each year end so showing the profit made each year to be taxed. This may well have taken some profits out of the higher rate bands in the later year, but the profits would still have been taxed in the earlier years, potentially at lower tax rates.

To go back and change previous years tax returns now may not be wise though, as there will be interest and late payment surcharges on the tax which should have been paid previously. Changing previous tax returns may well cause a tax enquiry and the IR may well not allow the valuations used for each year end anyway. The pros and cons need to be properly weighed.

At the end of the day, the maximum tax is 40% on some of the profits, so the amount kept will be over 60% of the profit made.