Unrealised Development Loss v Rent

[RichA]

Please can anyone confirm whether I can offset rental profit versus an unrealised development loss for the same property in a Ltd Co.

I developed a property within a Ltd Co and am now renting out that property.

I wish to clear down a bank mortgage with a directors loan (no interest to be paid) and without interest this will generate rental profit.

Is this a different trade? Can the loss offset?

Thks,
Rich

[Telometer]

This is complicated. The short answer is "probably not to any great extent".

Have you sorted out the VAT? You can end up with problems if you reclaimed VAT on the basis of anticipating a zero-rated sale and then instead rent it out - rent being an exempt supply.

How do you calculate the loss? Have you written down the value of your stock?

Which year did the loss arise, how much is it, how much is the rental profit?

[RichA]

Telo,
Thanks for your response.

Have you sorted out the VAT?
> It is a residential conversion. Not registered.

How do you calculate the loss? Have you written down the value of your stock?
> The Ltd Co has converted one property into two flats, sold one flat, rented the second flat. I was going to revalue / write down the value of this second flat.

Which year did the loss arise, how much is it, how much is the rental profit?
> Reval in y/e Apr09. Loss of £50k. Rental profit is upto £20k pa.

Thks.

[Telometer]

When you appropriate from stock to fixed assets, you will generate a trading loss/profit -on the basis that you are deemed to sell the property from your trade, and buy it back as a fixed asset. (This appears to be exactly what you plan to do.)

You can offset a TRADING loss arising in an accounting period (your company's "year") against rental profits of the same period. Any additional losses may be carried back into the previous year to reduce any TRADING profits you made then. If your trade has ceased - i.e. you have stopped developing flats - then you may carry losses back up to three years against TRADING profits.

When does your company have its year end? When did you transfer the property from stock to rental? Have you ceased trading?

Beware:

1. When you attribute market value to the property, in order to calculate the taxable loss, that is clearly a matter of judgement. You will have to have a proepr surveyor's valuation to justify your position - and be prepared for HMRC to dispute this if you have tried to be aggressive.

1b. Valuation is an art, not a science. To the extent you cannot use the trading losses in the ways I described - and do not anticipate using them in the future - it is to your benefit that the losses created are smaller rather than larger. A surveyor will give you a range of values, you can encourage him towards the higher or lower end of the valuations.

2. If you eventually sell the property, the company will pay corporation tax on the chargeable gain (i.e. "capital gain"). The base cost will be the valuation you adopted when you wrote the value down. You cannot offset trading losses against a capital profit. Beware.

3. If you cease trading and cannot use your losses, they become worthless. Do not deem yourself to have ceased trading too quickly. In order to preserve these losses if this is your only project, make sure you are continually looking for a new project, and then take one on.

4. Arguably you should have written down the value of the stock property in an earlier year than the one in which you transferred it to a lettings business. Be very careful in which year the loss arises.


Complicated, isn't it!