Property developers could gain a lucrative tax break by using Entrepreneurs’ Relief, though there are several qualifying factors to keep in mind.
Entrepreneurs’ Relief reduces Capital Gains Tax for individuals to just 10 per cent when disposing of all or part of a qualifying business. However, there is a lifetime limit of £10 million of qualifying gains.
Capital Gains Tax is a levy on the gain of profit received when disposing of an asset that has increased in value. Property development is considered a trading business so on its disposal could be eligible for the relief, whilst lettings are classed as investments so it wouldn’t be available.
When disposing of part of a business, such as selling shares or when liquidating a company, Entrepreneurs’ Relief is available as long as the company is trading, the recipient had held five per cent of the company’s shares for more than 12 months and is an officer or employee of the company.
Often property developers perform separate developments through different Limited companies. There are obvious benefits to this, for example ring fencing commercial risk or obtaining project specific finance. Providing there is real commercial rationale for performing each development in a different company then Entrepreneurs Relief would be available.
Essentially this means the company pays its Corporation tax on the profit of the project and then the assets remaining are distributed on liquidation to the shareholders as a capital disposal, subject to Capital Gains tax and Entrepreneurs Relief at 10% rather than higher rates of Income tax.
The introduction of anti-phoenix legislation mean the rules are now more stringent – see our advice about living with the anti-phoenix rule here.
For more information, contact your local office today.
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