Developers need to be aware of recent property tax changes when looking to structure their projects. Paul Morris takes a look at what developers can do.


Changes to the tax rules on liquidations in Finance Act 2016 introduced a punitive levy on the winding up of Special Purpose Vehicles (SPVs) at end of a project. Instead of the desired outcome of a successful claim for Entrepreneurs’ Relief (ER) to reduce the Capital Gains Tax bill to just 10% of the winding up distribution, under the new rules developers now face a 38.1% dividend tax charge, with the proceeds treated as income.

The change comes about from the tax office’s dislike of phoenixing businesses, which is a common model for smaller scale property developers.

Specifically, distributions will be caught if three conditions are met:

  • The company is a “close company” (broadly five or fewer participators)
  • Within two years of the distribution, the person who received it, or a connected party, is involved in carrying on a similar trade to the company (e.g. as a sole trader or in partnership)
  • It is reasonable to assume that one of the main purposes of the liquidation is to avoid income tax

To fall outside the rule change, developers have to avoid being involved in a ‘similar’ business or activity in the 2 years following the winding up distribution.

There is as yet no detailed tax office guidance on the rules, so the net for catching developers is potentially very wide. There is thus a tax risk where the property development vs. investment distinction remains unclear. And property activities in general could be adversely affected. Clarity from HM Revenue & Customs would be welcome.

Sale of shares

The rule changes do not apply to a sale of shares, but it may not be clear whether in that case ER will be available.

A buyer may prefer to buy an SPV, pre-packaged and with the Stamp Duty Land Tax (SDLT) saving. However, the extension to the ‘Transactions in Land’ rules in 2016 aimed at offshore developers have a much wider ambit, which would catch a sale of shares in an SPV company where the land in the SPV was acquired for development or as trading stock.

The share sale proceeds will be taxed as income at up to 45% (plus National Insurance) if held personally, or at corporation tax rates where in a Group.

In addition, if an ‘Investor’ purchases the shares of a company in which the land is held as stock, the buyer would incur a tax charge if it appropriates/holds the land as an ‘investment’. The buyer is therefore likely to demand a discounted price from the vendor to reflect this latent tax.

How to move forward

The rule changes will mean developers now adopt “Group” structures (with a holding company and SPVs below it), or company-based JV structures.

For SPV structures the SPV sells the land and crystallises the profit subject to Corporation Tax (with rates falling to 17% by 2020).  The cash is then extracted back to the holding company at 0% and reinvested in the next project.

The shares in the holding company should qualify for ER, but the value would only be extracted at some future point where the shareholders are ready to ‘hang up their boots’.  The danger with this scenario is that we do not know what the future holds for ER and whether it will remain available.

For JV structures, one party could buy-out the other’s shares to allow some to exit with CGT at 10% (as no liquidation), but this is unlikely to be available to all shareholders. It would also be subject to HMRC clearances and a likely stamp duty cost.

Following a reversal of the 2015 changes to ER in 2016, ER can now apply to shares held personally in a ‘corporate member’ of a JV company; therefore profits can be extracted back from the SPV company to JV corporate members for their separate reinvestment into their own future projects. This may be attractive when compared to the full Group structure linking all parties together in perpetuity.

There is no “one size fits all” structure to adopt. Each deal, JV etc. needs to be considered on its merits and you need to determine the right bespoke structure to fit the circumstances at the outset. Other issues will also need to be considered, including SDLT and VAT.

If you would like to discuss how best to structure your developments, please contact a member of our Business Tax team.


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