The highly anticipated economic slowdown may result in some residential property developers finding it difficult to sell new build residential properties. Many developers may decide to go down the temporary letting route instead of selling, until the market recovers.
If property developers do choose to temporarily let out their new build properties, there are significant tax implications to be aware of, as there could be an extremely unwanted repayment of VAT to HMRC.
To outline the tax consequences, we’ve asked Jonathan Jones, Senior Client Services Manager and Property Specialist to explain more.
Over to Jonathan
Whether this is your first property you’ve developed that you’ve decided to temporary let or just another addition to your impressive portfolio of newly developed lettings, it’s vital you know the tax obligations you are liable for.
Below I’ve explained everything you need to be informed about as a residential property developer who decides to temporary let, and highlighted solutions for VAT clawbacks you might encounter.
So, lets start with VAT…
VAT for Residential Property Developers
Its a fundamental principle that input VAT incurred on costs must be directly and immediately linked to a vatable sale. For example, a residential property developer can reclaim input VAT relating to building costs. This is on the basis that they will sell a new build residential property (a zero-rated supply). A residential property investor however cannot reclaim input VAT relating to building costs. This is based on the factor that they will let a residential property (an exempt supply).
The input VAT claimed on building costs by a residential property developer is often significant. The change of intention or use can result in a clawback of VAT by HMRC.
For example, let’s say that Developer Ltd incurred costs and reclaimed VAT of £100,000 on the basis that they intended to sell new build residential properties. Nine months later, Developer Ltd decides to take the properties off the market and grant a 15-year lease. The result? Developer Ltd must now repay that £100,000 to HMRC.
Solutions
What can be done to protect developers from the dreaded VAT clawback?
- Trade through a limited company as this allows the most flexibilities.
- Understand the rules, including the importance of intention (not actual use) and de-minimum limits.
- Transfer the properties from a development company to a letting company under common ownership.
- Transfer the properties from development company to a letting subsidiary.
Letting Subsidiary
The new build residential property will be sold by the development company to a newly formed letting subsidiary. This would be a zero-rated sale from a VAT perspective and input tax recovery in the development company is secured.
The sale would be free of Stamp Duty Land Tax (SDLT) due to the SDLT group exemption for supplies between a parent company and their subsidiary.
There will be a market value uplift in the development company for corporation tax purposes. This is because the property needs to be appropriated before it is transferred on a nil gain, nil loss basis to the letting subsidiary company. Consequently, corporation tax will be due on the unreleased profit. However, it should be noted that the market value of the property will have fallen due to the economic slowdown. A downside is that the letting subsidiary creates an associate for corporate tax purposes, which may increase the rate of corporation tax.
Here to help
Residential property developers that are considering to temporarily let need to quantify the potential VAT clawback and seek advice regarding their options. That’s where we come in.
We know there is a lot to think about, so if you’re looking for advice as a residential property developer, our friendly Property Specialists are here to help. To get in touch, please email [email protected]
