Property development tax

[Dorff]

I recently bought a rundown cottage to renovate. If I decide to sell it on and buy another to do up and sell on next year or the year after will the Revenue Comms. treat me as a developer and what kind of tax rate would I be looking at? I'm a PAYE worker and this would be a hobby, although I would want to make a bit of profit.

 

[ubiquitous]

I recently bought a rundown cottage to renovate. If I decide to sell it on and buy another to do up and sell on next year or the year after will the Revenue Comms. treat me as a developer

Probably, yes.

what kind of tax rate would I be looking at?

Income tax at your marginal rate.
RCT on payments to subcontractors
VAT

 

[Dorff]

Thanks for your reply - can you tell me what RCT is?

 

[ubiquitous]

Relevant Contracts Tax - effectively a tax deduction mechanism that forces contractors & developers to deduct 35% tax at source from payments to subcontractors unless they hold specific certification from the Revenue. Where procedures are not followed correctly, the contractor or developer is normally liable for the 35% tax, regardless of whether it was deducted from the subcontractor in the first instance.

 

[woods]

You will pay 20% CGT on your profits and no more.
I have done a number of multi unit developments in this country and have never paid more than 20% tax.

 

[ubiquitous]

I have done a number of multi unit developments in this country and have never paid more than 20% tax.

Have you done so on the basis of professional advice? You would need to be very sure of your ground on this if the Revenue ever audit your tax returns.

 

[Lobby]

Aye, strictly speaking this is treated as a business by the revenue and as such is taxed as income tax NOT CGT.

However, income tax on residential land for development is only 20%, but income on works done is taxed at the marginal rate.

 

[woods]

Have you done so on the basis of professional advice? You would need to be very sure of your ground on this if the Revenue ever audit your tax returns.

I have 2 accountants dealing with this (one for personal and one for business) and they are both clear on what is going on and on what tax is being paid and I can not think that they are both wrong.

 

[ubiquitous]

Fair enough. It just sounds pretty conclusive to me that anyone who has done "a number of multi unit developments" is a property developer and should expect to be taxed accordingly. On the other hand, an amateur who renovates a cottage & sells it for a once-off profit might well benefit from the more relaxed CGT rules, but once a pattern of transactions emerges, it is increasingly difficult to claim that each is a capital gain.

 

[woods]

Fair enough. It just sounds pretty conclusive to me that anyone who has done "a number of multi unit developments" is a property developer and should expect to be taxed accordingly. On the other hand, an amateur who renovates a cottage & sells it for a once-off profit might well benefit from the more relaxed CGT rules, but once a pattern of transactions emerges, it is increasingly difficult to claim that each is a capital gain.

I agree but I do not make the rules.
In fact I would go as far as to say that there should be no such thing as CGT and it should all be income tax but if it takes you 3 years to bring a project to fruitition then you should be able to spread it out over 3 years and use 3 years tax credits but otherwise it should be income tax.

 

[ubiquitous]

if it takes you 3 years to bring a project to fruitition then you should be able to spread it out over 3 years and use 3 years tax credits but otherwise it should be income tax.

Er, income tax rules and accounting standards already allow for that, by means of Work in Progress being valued at each year-end and rolled forward into the subsequent year until the project comes to fruition.

 

[Dorff]

Thanks to all who replied. I saw my accountant yesterday and he pretty much confirmed what Ubiquitous has said. The tax situation is grim enough to convince me to hold off on selling and let the property instead.