Company Trading Vehicle for Property Developers
Property developers often use a company trading vehicle to hold their properties as it can provide various benefits. However, it is important to understand the tax implications of this structure. At SMH Accounting & Business Advisory, we provide property taxation services to help our clients navigate the complex tax laws and ensure compliance.
What is a Company Trading Vehicle for Property Developers?
A Company Trading Vehicle for property developers typically refers to the legal structure or entity that property developers use for conducting their business activities. The choice of a trading vehicle can have implications for issues such as liability, taxation, and financing.
One of the key benefits of using a company trading vehicle is the ability to claim tax relief on the interest paid on any loans used to acquire or improve properties. In addition, a company trading vehicle can also provide protection from personal liability and allow for easier transfer of ownership.
Example
Company A acquires 25% of the share capital of Company B for £500,000. Company B builds some houses. Company A sells its shares Company B and makes a profit of £250,000. The sale qualifies for SSE and the gain is therefore exempt from tax, so Company A can re-invest the whole £750,000 proceeds in the next project.
However, there are also potential drawbacks, such as increased administrative and compliance costs. One issue to be aware of is the substantial shareholder exception (SSE) rule, which applies to companies that are carrying out a property business. The SSE rule can affect the availability of entrepreneurs’ relief (ER) on the disposal of shares in the company. ER can provide a lower capital gains tax rate of 10% on the disposal of shares in a qualifying company, subject to certain conditions being met.
To qualify for ER, the shareholder must have held at least 5% of the company’s ordinary shares and voting rights for at least two years prior to the disposal. In addition, the company must be a trading company or the holding company of a trading group, and at least 80% of the company’s assets and activities must relate to trading.
However, the SSE rule can restrict the availability of ER if the shareholder’s interest in the company is reduced below the 5% threshold within two years of the disposal. This can occur, for example, if new shares are issued to raise capital or if existing shares are sold to other investors. In such cases, the shareholder may be subject to a higher capital gains tax rate of 20%.
How can SMH Group Help?
At SMH Group, we can provide advice on the use of a company trading vehicle for property development and the potential impact of the SSE rule on the availability of entrepreneurs’ relief. Our property taxation experts can also assist with compliance and reporting requirements, including the preparation of tax returns and dealing with HMRC enquiries.
Contact the SMH Accounting & Business Advisory team on info@smh.group or 01142 664 432 to learn more about our property taxation services and how we can help you manage your tax affairs.
