Self-builder, property investor or contractor (developer)
As far as HMRC is concerned making money out of property development or property speculation is a taxable activity and there are strict rules for compliance. So, your first priority is to identify your technical status within the published definitions from HMRC and your first port of call should be their Construction Industry Scheme (CIS). Here a qualifying ‘contractor’ will have to register before any project activity and prepare to make monthly returns to HMRC on all payments made to a qualifying ‘sub-contractors’. Their responsibility is to make taxable deductions when paying sub-contractors where appropriate or to account for gross payments made to all sub-contractors who have gross-payments status.
We might not ordinarily consider ourselves to be a qualifying contractor but the definitions are clear; Mainstream Contractors include any property developers or speculative builders, erecting or altering buildings in order to make a profit and Deemed Contractors include those where their average annual construction expenditure in a three-year period exceeds £1m. However, private householders are not counted as contractors and they are therefore not covered by the CIS scheme so long as they are only carrying out works on their own private properties, not intended for sale, and where they are below the deemed contractor expenditure cap.
Developing your own land
For those of you who are lucky enough to secure planning permission in your own gardens, the following scenarios should apply but, as this is very specialist advice, always check with your accountancy adviser first.
- Consent for one new house which you intend to build for your own principal use. Planning for one new house in your garden can be highly tax efficient, as long as you intend to build it for your own occupation; i.e. as soon as it is completed you will move into it and make it your principal private residence (PPR). Here you will have no CIS obligations to any contractors used, you will be able to claim back any VAT spent on qualifying materials, there will be no stamp duty land tax (SDLT) because there is no site to buy, no community infrastructure levy (CIL) to pay the council and no income tax (IT) or capital gains liability (CGT) when you sell your existing house within an acceptable period of time. You’ll only start to incur a tax liability if, having transferred the PPR status from your old house to the new one, you elect to keep the old one as an investment property. Here you will be subject to IC on any rental sums received and CGT on any gains made to the property’s value on disposal. In summary, those of you who secure planning consent on your own garden land will make a very sizeable equity gain largely through the land value uplift. Be mindful of the self-builder’s exemption from CIL, as this will obligate you to stay resident in your newly built property for a minimum period of time.
- Consent for one new house which you intend to build as an investment. For those who want to build the new house as an investment, no CIL exemption will apply, no VAT reclaim can be made under the DIY scheme and you will be subject to IT on any rental income and, because this will not be your PPR, you will be liable for CGT of any up-lift when the asset is ultimately sold.
- Consent for one (or more) house(s) which you intend to build and sell. For those of you who want to build the house in your garden with the express intention of selling it to make a gain, you will be treated as a property developer. Here you will not have a CIL exemption, you will be a qualifying contractor and will be subject to CIS, you’ll have to pay IT on your gains and you will not be able to reclaim any VAT incurred through the DIY claim process. In these circumstances, your accountant may advise you to set up a limited company and pay Corporation Tax (CT) and/or to register for VAT either as a business or an individual.
The test here is all about your original intentions. I am sure there are examples of people who have built a new house fully intending to move into it as their PPR but, for financial reasons, have ended up selling it. In these circumstances you could be at risk from a very substantial tax bill and any advice here is way beyond the scope of this article.
Buying a plot
If you purchase a plot on the market, the same rules as above will apply. The only difference is that SDLT will have to be paid on the plot acquisition price but, thereafter, there will be no SDLT on your subsequent construction costs. With SDLT now at quite a punitive level, this is a quite a substantial hidden benefit for self-builders.
Self-building to maximise value
The most common motive for self-building is design and specification which is why there are so many interesting architectural examples of well stocked, highly specified homes. But, if your motive is ultimately financial gain then you need to think like a developer. Although location, orientation and style are important, homes are generally valued first on the level of accommodation provided. Estate agents will use net internal area figures for all floors (NIA) and apply local new-homes-selling-rates and then add a balancing figure to cover the habitable room content (Nos. of beds, baths etc.), location, perceived quality and any special site features. As a snapshot, the developer mix includes:
- Maximum NIA to reflect similar properties in the area but beware of over development; i.e. a large three storey five-bedder may not command its true value in an estate environment of three bed semi’s. Consent for two three-bedders would probably be more appropriate instead.
- Simple structures, cuboid where possible, and with minimum level changes. Complexity takes time and time on site means more labour costs.
- Add some attractive (but not complex) features; i.e. a chimney, an oriel window, rooflights in the attic, a Juliette balcony, strategically located to focus the eye.
- Mix the external material with some contrasting colours and textures, including horizontal painted cladding, vertical tiling, stone or brick quoins. Just enough to sweeten the eye and in key elevations only.
- Be really careful about your internal specification. Don’t go mad on the kitchen and bathrooms, porcelain tiles instead of stone, mid-range windows, doors and joinery that will wear well.
- Make a virtue out of a couple of features; like underfloor heating to the ground but radiators to the first floor, and a wood-burning stove in a principal reception area. But be careful, as these are nice-to-have items that don’t really affect final value.
And last but not least, you cannot afford to pay over the top for the land. There are many examples of folks who have paid a 10-30% premium for their plot (and without full due diligence) and then find themselves struggling to manage their build costs as a result. If your intentions are to build value, then the land has to be acquired at the right price.
Serial self-building
Tax incentives apply to any gains made from our PPR. There is nothing to stop us from regularly moving house and indeed this is recognised as one way of moving up the property ladder. Equally there are no written restrictions about the number of times that you can sequentially build yourself a house. As already mentioned, the test is in your intention. If you have a day job and a salary and build your self a house four times in 10 years, sequentially moving house, transferring your PPR and selling the previous property each time then it would be difficult to argue that this was a hidden business. But, if you give up your job and start working part or full time on sequential self-builds you are clearly vulnerable to an assertion from HMRC that this is in fact your de-facto business activity. This is why professional advice and guidance on an individual basis at the right time from appropriate advisers is so important. The above is a practical summary of principles and should not be considered absolute!
Development finance and mortgages
Finance is available for most types of project, but lenders do have different products which are carefully packaged to suit the different typologies. Self-build mortgages are available with different cash flow models for individual self-builders with and without land acquisition. These products are usually offered based upon individual affordability but also increasingly on a project viability test as well. However, the moment that a project becomes speculative and/or profit driven, mortgage products will no longer apply, and development finance must be sought. This is usually more expensive finance and the loan to value ratios may well be reduced whilst the interest premiums may well increase. Not surprisingly the lender will want a much more detailed analysis of project costs, valuations, timetables, contractor profiles and so forth in order to properly calculate their risk and exposure. You are always best advised to seek help from a specialist broker who can help you to properly prepare and channel you to the correct type of products.
Written and published in March 2018
