A popular daytime TV programme follows people who renovate residential properties for a profit, but it rarely spells out the tax implications for those entrepreneurs.
If the property development business is operated as a sole trader, or a partnership, the profits made on selling the properties are subject to Income Tax at rates of up to 45% (46% in Scotland) plus Class 4 NIC.
Alternatively, if the renovated properties are held to generate rental income, the business is treated as property investment. In that case, any profits made on selling the properties are subject to Capital Gains Tax at 18% or 28%.
Where the business is operated through a company, the income and gains from property development or investment businesses are both subject to Corporation Tax at 19%. But companies are also liable to pay the Annual Tax on Enveloped Dwellings (ATED) for any residential property they hold which is worth over £500,000.
The ATED charge varies from £3,650 to £232,350 per year, but relief can be claimed for periods when the property is commercially let, or if the property is part of development trade. Renovating a single property can amount to a development trade, but to prove this the company should forecast the expected profits and produce a business plan.