We all know the property market has been through terrible times lately. Some businesses, set up in the good times to invest in let property for the long term, have been forced to sell some property to generate funds to cover ongoing costs.
Where a property investment business starts to develop properties for sale, rather than keeping them for long term letting, the business has started a trade of property development.
So a property, previously held as an investment, is transferred to “stock” , meaning it is now stock being made ready to be sold, then that property must be treated as if it had been sold at its open market value at that point.
This can create a capital gains tax charge, or a capital loss, before the property has actually been sold.
To avoid this problem the business owners can make an election to treat the value of the property when it enters stock, as the value when it was acquired by the business. Any gain or loss will then only arise when the property is eventually sold by the business. This election must be sent to the tax office within two years of the end of the accounts year for a company, or by the first anniversary of 31 January following the tax year end for an unincorporated business.
Besides the timing issue, the advantage of making this election is that the loss, if one arises, becomes a trading loss made on the sale of stock by the business rather than a capital loss. Generally a trading loss can be set-off against a wider range of income than a capital loss. However, to use this trading loss the Taxman will have to be convinced that the property business has actually started a trade of property development, and is not simply selling off its surplus investments.
This can be a very difficult area and full advice is essential so please contact us for advice in your own circumstances.