Buying properties into you own property development company is very popular and there are lots of TV programs that tell you how much you could make.
Property Development is a trade where as property investment isn’t.
So what happens if you develop a property and then decide to keep it as an investment rather than sell it?
This known as reclassification and there would be an immediate deemed disposal under TCGA 1992, s 161 as a result a taxable trading profit would calculated based on the market value. The tax would be payable even though the property had not been sold and a profit had not been realised.
The courts have looked for the following evidence of reclassification:
- Balance Sheet reclassification moving the asset from Trading Stock to Fixed Assets
- Transfer of the property to an investment vehicle including Group Companies
- Board resolution that property is being held as an investment
If the market value is below carrying value at the time of appropriation, this would create a trading loss which can be offset against other profits in the year or group profits.
