Single property development, with other person(s)

fluffpot

Hi there

I work in the trades and I'm considering doing this with another person who is also a trades person. Between us, we know enough of the right people to get the work done. Any advice?

My thoughts
1. We would of course get some sort of legal agreement (deed of trust?) drawn up. What needs to be in this? I am of the opinion it's worth paying for solicitors advice at this stage rather than if there are problems! Would I need a specialist solicitor?

2. We would be putting in cash, but probably of different amounts - presume this can be covered by the deed of trust?

3. I can re mortgage to raise extra capital (I have about 90% equity in my house). Is this a good idea to enable us to take on a more profitable project (I do understand there is risk!) What if the other person is cash only?

4. I'm self employed and so I'd pay income tax on any profit. Are interest payments on the loan tax deductible? I'm a higher rate tax payer, but my parter (and joint mortgagee) isn't. Can I take advantage of this?

5. How do you account for the non cash element that each person puts in? ie time/labour? I was thinking either we pay ourselves or keep a record of hours spent and if they balance out, great, or if not recompense the other person. Anyone done this in practice?

This is all very much first stage at the moment, just looking for advice if anyone else has done something similar

thanks for reading

SB

da_rule

1) What do you want the legal agreement to cover?
2) If you're putting in unequal amounts then you can own the land (and subsequently any property built there on) in unequal shares.
3) The risk to your own home if the project goes tits up (for want of a better term) might be something you want to consider before doing this.
4) My understanding is that unless you are actually a property developer, then any profit will be chargeable to capital gains tax rather than income tax, as income must be of a repetitive nature, this type of income (proceeds of property sale) would not be repetitive unless you are going to do this more than once.
5) You could pay yourself, or you could agree to apportion an amount of the proceeds of sale.

Also, are you a sole trader/partnership/limited liability partnership/limited company etc?

fluffpot

thanks for the quick response

1 - I guess everything it needs to should things go wrong! Plus how we divide up and profits
2 - Yes, so like 40/60 say? I remember when I bought with my husband (who was just a partner at the time) I put in more £ so the solicitor drew up some sort of agreement to reflect this.
3 - agree! What is the risk? I guess I'd need to know that even if I lost the cash, the remortgage element could be recouped if necessary - by say selling the development property. I realise there is always an element of risk, but want to minimize eg full structural survey, legal agreement to stop the other person running off with £!
4. Oh, I thought it was the other way around (ie CGT if you are a developer). Will check this. This would be a one off so not repeat.
5. yes

We are both operating as sole traders at the moment, not envisaging setting up a new entity for this project as it's a one off, but would rely on a legal agreement. Unless advised otherwise

I should have said that we would be looking to buy, develop and then sell - not retain and live in or rent it out

thanks again for your time

da_rule

The fact that it is a one off is what makes it chargeable to capital gains rather than being income (i.e. not in the course of your usual business).

In terms of mortgaging your house you obviously run the risk that if the bottom falls out of the market again then you may be putting your home at risk. In terms on whether you can deduct the interest on your mortgage as an expense is something you'll need specific advice on, especially as I assume the mortgage is in you and your husbands name.

I would get an agreement set up setting out how much of the proceeds you can each take as well as what to do in terms of your non-monetary contributions.

00ec25

da_rule wrote: »

4) My understanding is that unless you are actually a property developer, then any profit will be chargeable to capital gains tax rather than income tax, as income must be of a repetitive nature, this type of income (proceeds of property sale) would not be repetitive unless you are going to do this more than once.

da_rule wrote: »

The fact that it is a one off is what makes it chargeable to capital gains rather than being income (i.e. not in the course of your usual business).

No
where there is an intent from the outset to buy in order to (develop and) sell on then it is most likely to be deemed to be property trading (even if there is no repetition) and so is subject to income tax not CGT
the tests of the "badges of trading" is a complex area and much open to a range of interrelating factors rather than a simple yes/no, the following gives a flavour of the complexity:
http://www.hmrc.gov.uk/manuals/bimmanual/bim60000.htm

once trading is established then it is cut and dried about income tax
http://www.hmrc.gov.uk/cgt/property/basics.htm
"Property trading
If you buy and sell property as your business you pay Income Tax rather than Capital Gains Tax on any profits you make from the property. This applies whether you are a sole trader or in a partnership. This may include a one-off purchase and sale of a property. You usually pay any Income Tax due by completing a Self Assessment tax return.
If you are a director or shareholder in a company which carries out property trading, any profits on properties disposed of are part of the company's profits. The company will pay Corporation Tax on its profits."

00ec25

fluffpot wrote: »

4. I'm self employed and so I'd pay income tax on any profit. Are interest payments on the loan tax deductible?
Yes
I'm a higher rate tax payer, but my parter (and joint mortgagee) isn't. Can I take advantage of this?
depends

unless your partner had an active stake in the property development business (eg she was "on the books" of the business) then her share of the loan interest would fail the wholly and necessarily test and so could not be claimed against the profits of your business

fluffpot

Hi 00ec25

many thanks for that - I see now about CGT.

My partner would be involved in that some of the money is his and he would be named in any agreement, so I guess this makes him part of the process even if he's not on site! As I understand it, 'our' profits would be split between us and we would pay any necessary tax on each . He's also self employed but not in building trade