Changing your mind on whether to keep a development or sell it? beware of the tax

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:

1. Balance Sheet reclassification moving the asset from Trading Stock to Fixed Assets
2. Transfer of the property to an investment vehicle including Group Companies
3. 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.

steve@bicknells.net