The lack of mortgage finance and a lack of confidence in the pricing of UK homes over the next twelve months means that residential property developers are looking at all options to stay afloat.
Two key options being considered by many developers as a way of generating some cash flow are:-
1. Letting of new homes
2. Taking homes in ?part exchange? when selling new homes
Whilst both of these options can ease cash flow and help a developer survive there are pitfalls for the unwary which can result of significant repayments of VAT ? just when a developer wishes to avoid all such liabilities.
The building and sale of new homes is a ?zero rated? supply for VAT ? which means a developer can reclaim all of the VAT on his building costs. If no sale is made (because the property is let) the developer moves from making a ?zero rated? to making an ?exempt? supply.
Similarly if a developer takes a house in part exchange for one he has built the subsequent sale of the part exchange property is exempt from VAT.
Both of these actions take the developer into the regime of ?partial exemption? and the repayment of VAT reclaimed (unless the VAT recovered during the building of the original property falls below the de minimis level of £7,500 per annum and 50% of the total input tax of the business).
However a little advance planning can avoid these problems.
If a developer is letting his newly built property he should consider selling it first to another group company, before letting.
Similarly where properties are being taken in part exchange a developer should take ownership of the part exchange property in another group company.
This article deals only with VAT. When undertaking any tax planning all taxes should be considered with professional advisors before implementing any proposal.
For the investor Capital Allowances allow tax bills to be reduced and increase cash flow. If the initial investment in a building is reduced by virtue of paying less tax the yield increases.
About Kingston Smith’s property team
Kingston Smith is the fastest growing top 20 firm of Chartered Accountants. Our property team have considerable experience in the property sector and work with clients in property development, construction, investment and management. We help clients run their businesses more successfully by providing practical advice such as planning ownership structures to minimise their tax exposure. We provide accounting services ranging from bookkeeping and management accounts to the preparation and audit of year end financial statements, as well as helping to improve financial efficiency and source alternative methods of funding.
To find out more about Kingston Smith?s bespoke services to the sector please visit: www.kingstonsmith.co.uk/kingston-smith/sectors/property.html
