Property Corporation Tax - Roll-Over RELIEF???

HouseFlipper

Hi,

I would be very grateful for advice from people with experience in this as I am getting very confused... I am a newby property developer, and created a LTD company last year, being under the impression it would be more beneficial tax-wise, as the gross profit made from selling houses, could be reinvested into other houses ("Business Asset Roll-Over Relief"), therefore deferring and reducing corporate tax. I.e. no corporate tax to pay on that profit if reinvested.

Now I am doing my first set of accounts with my accountant, and she has never heard of this (she is a very good accountant but does not deal with properties usually) and is preparing my accounts the normal way, with sale price of property as income, original purchase price of property as cost of sale, and corporate tax to be paid for the net profit.

She says I should have setup a PAYE scheme to pay myself a wage to offset most of the profit (not much profit in the first year). But I was avoiding that since I thought I could reinvest and not pay tax...

The accounts have not been submitted yet, so I need to figure out if Business Asset Roll-Over Relief does exist for Property Developers... and if it does, are refurbished properties assets or trading stock? Can they be freehold as well as leasehold?

Many thanks! Ms L x

TM1976

She is right.

Roll over relief does exist but it's part of the capital gains system. As your company's trade is developing properties profits on this should be taxed as trading profits.

HouseFlipper

Thank you for the reply.

I have read about the roll-over relief being part of the capital gains tax system, but I also saw it was part of Corporate Tax for Ltd companies? I am copying at the bottom of this message an extract from the HMRC inland revenue website. I cannot link websites yet.

I read online about several expert Property Accountants that advise that if you are a property developer, that you create a Ltd company so you can reinvest your profits and keep deferring tax payments... So if it is not the above Business Asset Roll-Over Relief, maybe they use some sort of other tax loop?

Many thanks!

Extract:
Deferral or exemption from Corporation Tax on chargeable gains

You might be either exempt from or be able to defer a charge from some or all of the Corporation Tax on the sale or disposal of certain assets. Depending on the circumstances your company or organisation may, for example:

• claim Business Asset Roll-Over Relief
• qualify for the Substantial Shareholding Exemption

Business Asset Roll-Over Relief

When your company or organisation sells or disposes of some types of business asset, such as land and buildings, but buys a new asset to replace it, it may be possible to reduce the cost of the new asset for chargeable gains purposes by the amount of the gain that arises on disposal of the old asset.
When the new asset is disposed of, the chargeable gain (or loss) is worked out by using the cost of the asset, less the gain that’s been rolled over. (See the section below for an example of how this works.)
Qualifying assets

For Business Asset Roll-Over Relief to apply, the asset must be a 'qualifying asset'. A qualifying asset must be used solely for the purposes of the trade. Qualifying assets may include:

• freehold land and buildings
• aircraft
• ships

But Roll-Over Relief is not available to your company or organisation if intangible fixed assets (for example goodwill) are acquired or disposed of on or after 1 April 2002.
For example:

Your company or organisation sells a shop for £80,000 making a chargeable gain of £30,000. It then buys a new shop costing £90,000 (reinvesting the £80,000 from the sale of the old shop), and claims Business Asset Roll-Over Relief on the gain of £30,000 - so no Corporation Tax is payable at this time.
But in your records, you deduct the original chargeable gain of £30,000 from the purchase cost of the new shop, making £60,000. When you dispose of the new shop, you use this figure of £60,000 - not £90,000 - in your chargeable gain calculations.
If you don’t invest the entire proceeds from the sale of the old shop into a new shop, you can’t roll-over the whole gain.
See the link below for an example of how to calculate the relief when you only reinvest part of the proceeds.
If you want to claim Business Asset Roll-Over Relief you should make a claim in writing and send it to your Corporation Tax Office. If you’ve received a ‘Notice to deliver a Company Tax Return’ from HMRC, include your claim with your Company Tax Return or amendment to that return.

NiceGuyEddie_2

Ask yourself the question: when I'm selling the house, am I making an ordinary business sale (trading) or disposing of an asset I've used in the business to carry out the trade (capital disposal)?

From the information you've provided, you're trading and hence roll-over relief is irrelevant.

HouseFlipper

Thanks for the reply too

I am starting to think I made a big mistake opening a Ltd company as I am not making big enough profits to have any benefit from it, and it is quite complicated to keep on top of everything. I would need to setup a PAYE system now to pay myself and pay NI and taxes as an employer and as an employee to benefit somehow of my personal allowance. I am also always paranoid my accounts won't balance and keep checking them...

I am thinking I may close the Ltd company and just buy the next house in my name and do it the old "income tax" trading way, with a self-assessment return at the end of the year (I rent out a buy-to-let property so I already do a self assesment return for that). % Income tax is about the same up to £37,000k profit (plus allowance) as Corporate Tax (up to £300,000k but I'd never have that much profit anyway) and everything is so much simpler.

Does that make sense or am I missing again something. Sorry if I sound stupid but I am not really accountancy minded, just have a passion for houses and am not really enjoying this accounting side.

Thanks again.

TM1976

As a rule of thumb it's generally not worth trading through a limited co unless you are making enough to pay 40% tax. In it's favour though it does give you limited liability - ie you aren't personally liable for the company's debts. The other advantage you may not have considered is with property development your profits don't realise in a uniform way - ie one year you could make nothing and another you could make £100k. If so you may not take full advantage of your tax bands, where as with a limited co you can release this profit over a longer period and possibly keep within the 20% band.

How much money do you expect to be making? Will you be full time property developing? If you are going to be full time property developing and not making enough to be in the 40% band you might be better off just getting a full time job.

Is it worth closing your limited co? It depends how far down the road of trading through it you are as you may still have to do a lot of the accounts etc then have to wind it up.

HouseFlipper

Hello again, thank you again for the reply and the extra input and food for thought. Especially with the uniformity of profits...

I would need to still do the accounts for this year as I am completing a house at the moment, and hoping to sell it within the accounting period (which ends 31 March 2011). And then close the ltd company I think. In the meantime I would buy a new house in my name, it is quite lucky it had not gone through yet actually as I can change it from ltd to personal purchase at the last minute.

I have ralised I am doing less profits than I hoped for when I started out, less than the 40% band indeed... but even if I bought and sold houses paying taxes via income tax, instead of ltd co, I am happy and have so much freedom, something I never did when I had a full time office job (also less than 40% tax band anyway). Plus I love doing houses up and I am a woman trying to have a child, so I wanted to have this freedom that this line of work allows.

Thanks again for the advice, it has really helped making some big decisions.