Small-scale property development has become one of the most popular property strategies for existing landlords looking to create greater profits and for new investors who may previously have only considered a buy-to-let model. The impressive returns and significant scope presented by the government’s recent changes to Permitted Development Rights have generated unprecedented interest and a wealth of opportunity. But how can those new to development enter the fray and make serious money without making serious mistakes?
According to Benjamin Franklin, nothing is certain except death and taxes, but to be fair to him, he never met my accountant. Now, I’m a keen advocate of the view that paying lots of tax is a good thing because it means you must be making lots of money. But given that property development can see some chunky sums flying around, it’s certainly a good idea to make sure that you’ve taken steps to make sure you’re not paying any more tax than you have to.
The trick with tax is to get things set up properly from the start. I recently spoke to a student who had just joined us, having previously completed a project that bore an all too familiar seat-of-the-pants hallmark. He’d been drawn into the ‘let’s give development a go’ approach and thought it would be a good idea to dive in and learn as he went along. After all, how difficult can it be? Unfortunately, he found out the answer quite quickly. Everything went swimmingly until he fell down one of the numerous big holes dotted around the development landscape, seemingly designed to entrap the uneducated and unwary. Luckily for him, the experience led to an epiphany and a healthy appetite to understand where all the big holes were located, which we were happy to help him with. After all, minefields are only a major problem if you don’t know where the mines are. However, one of his challenges was the way he’d set up his property development business structure. He’d ended up paying over £80,000 in tax that he would have avoided if he’d known one simple fact at the outset. Education comes at a price, but all too often, ignorance can end up costing significantly more. And like so many tax challenges, he wasn’t able to unpick what had happened and start again. Frustrating, to say the least, and a stark reminder that it pays to get things right from the outset.
So, where should you start when it comes to structuring your property development business and thereby dodging any unnecessary tax bills? I need to mention at this point that I’m not an accountant, so I can’t give you any formal advice. But I can give you some pointers that could steer you in the right direction when you speak to your own accountant or tax advisor (something you should definitely do).
The first thing to be aware of is that each development project will need to be set up as a brand-new limited company, known as a special purpose vehicle (SPV). Your commercial lender will insist on it, as it ensures there’s no extraneous baggage, such as previous trading or other shareholders, that could complicate matters for them. It’s a clean sheet of paper through which all of the SPV’s financial transactions and contracts will be run. If you have a joint venture arrangement, you and your JV partner will typically be co-directors of the SPV, with a shareholding to match your respective stakes.