New changes to tax rules will push thousands of property development schemes into the red

New changes to tax rules will push thousands of property development schemes into making losses including on housing currently being built. The changes, announced as part of the Finance Bill, will nearly quadruple small housing developers’ personal tax rate from 10% to 38.1%. This will exacerbate the housing crisis by reducing the amount of new and redeveloped residential property coming onto the market.

Most small developers currently pay tax at 10%
At present small developers typically set up a new company for each property they develop for sound business reasons and then dissolve the company after the property is sold. Dissolving the company releases the company’s capital to the developer with a 10% rate of tax.

New rules would mean a tax rate of 38.1%
Government proposals would see the capital released from the company taxed as income – equivalent to a dividend. This would mean a tax rate of 32.5% for higher rate tax payers and 38.1% for additional rate taxpayers.

Unintended consequences
Moore Stephens explains that the proposals are designed to prevent business owners from regularly winding up their companies and then immediately setting up a very similar business, in order to gain a tax advantage.

Vincent Wood, Partner at Moore Stephens, says: “These changes will result in less new and refurbished housing for sale in the UK.

“The new rules will hit small property developers disproportionately hard.

“Profit margins for small housing developers are extremely tight and projects are planned down to the last penny. These changes will make it extremely difficult for many new and ongoing developments to make a worthwhile profit and when you add in the developer’s time and effort it will effectively drive many developments into loss-making territory.

“These changes are part of a Government commitment to cracking down on tax avoidance but come with significant unintended consequences.

“Property developers set up a separate company for each development for good commercial reasons, often they will have different funding or construction service providers for each project.

“It is very difficult to see how this chimes with the Government’s stated policy of encouraging more house building.

“These changes will come in on 6 April 2016 which is far too soon for developers to plan adequately, and transitional arrangements to phase in the changes should be considered urgently.”