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Readers' Forum
Replies to Queries — 4
Development dilemma
We have been appointed by a limited company and its directors, Mr and Mrs A. For some years, Mr A has been a self-employed builder/subcontractor.
Readers' Forum
Replies to Queries — 4
Development dilemma
We have been appointed by a limited company and its directors, Mr and Mrs A. For some years, Mr A has been a self-employed builder/subcontractor.
Nine months before incorporation, the couple purchased land for £25,000 intending to build a house and sell it on completion. Our predecessors advised them to set up a limited company and, on incorporation, the land and the part-completed building was sold to the company at the then market value of £70,000.
The sale price was apportioned equally between the land and the building work. The sale of land would be subject to capital gains tax, but covered by their annual exemptions. As the costs incurred on the construction work amounted to approximately £20,000, Mr A's profit as a sole trader up to the date of incorporation would be £15,000.
A further point was that Mr A was to continue as a sole trader undertaking 'small' construction jobs and the company would undertake the larger work, including any building contracts.
We need to prepare Mr A's self-employment accounts to 5 April 2004, and will include any profit on the above development up to the date of its transfer to a limited company. But we have some concerns about our predecessor's advice on the taxation of the £70,000 transfer value, particularly the application of capital gains to the sale of the land.
We consider that, in reality, Mr and Mrs A purchased the land with a view to its development at a profit and this is a trading activity. Partnership accounts will therefore be needed for the period from commencement to cessation (i.e. on incorporation) and the profit of £25,000 will be subject to income tax and Class 4 National Insurance. This will of course lead to a penalty for late notification and other National Insurance liabilities will arise on Mrs A. We also consider that the continuing self employment of Mr A, concurrent with the company, is an unnecessary complication.
Do readers have any alternative (and lower tax) views of the matter?
(Query T16,479)
