Five Important Tax Strategies for Property Developers

16 January 2025

Building a Business, Property Investors & Developers, Property Owners, Raising Finance, Reducing Tax, Structuring a Business

Tax is often an afterthought for many individuals, coming as an unwelcome surprise at the last minute when cash flow is tight.

However, planning ahead can make a world of difference—especially for property developers.

Here are five essential tax strategies that property developers should consider to optimise their financial outcomes and reduce risks.

Setting Up a Company

Property developers’ profits can fluctuate significantly depending on when properties are built and sold.

In one year, a developer might have no profits; in the next, they might see profits of £250K or more.

Potential Benefits of a Limited Company

By operating through a company, developers have greater control over their tax obligations.

For instance:

A profit of £250K in a company would incur a 25% corporation tax, or £62,500 (2024/25 tax year).
As an individual with no other income trading as a sole trader, the same profit would result in a tax liability of £104,998.60—a staggering £42K more.

The advantage is only lost if the developer decides to withdraw the profits from the company for personal use. A lot of developers however want to roll their profits into the next development to reduce their dependancy on external financing or to take on bigger projects.

As a sole trader the developer does not have this option.

This flexibility can be invaluable for growth.

Cashflow and the Accruals Basis

For self-employed individuals (sole traders), the default accounting method is typically the cash basis, where tax is assessed on the net of what’s received and paid out.

However, the cash basis is only available for businesses with turnover up to £150K—a limit most property developers quickly exceed with just one or two property sales.

For a company, the accruals basis is mandatory.

This method assesses tax based on income earned and related expenses incurred during the year, regardless of when cash is received or spent.

Importantly property or land purchased for development is treated as stock or work-in-progress and isn’t deductible until the related properties are sold.

Therefore once a development is completed the reinvestment of all the profits into a new development could create a major cashflow issue as the developer must still budget for corporation tax, which falls due nine months after the year-end.

Understanding the accruals basis is crucial to managing cash flow effectively and avoiding surprises.

VAT

We’ve written extensively about VAT opportunities for property developers, especially those looking to renovate disused house or undertaking new builds.

Anyone involved in property development must consider VAT and Stamp Duty, whether it’s costs charged by contractors or the need to operate a VAT scheme due to the nature of supplies, such as zero-rated new builds.

Significant VAT savings are possible if you and your suppliers understand the rules.

Reviewing the VAT treatment of every project is crucial to maximise opportunities and make informed decisions about proceeding or amending a development.

For example:
If you partially demolish a property but keep some features, it won’t qualify as a new build.

Contractors will charge VAT, which cannot be reclaimed.

However..

Demolishing the entire property and building a new one could qualify as a zero-rated new build.

This means contractors charge no VAT, and you can fully reclaim VAT on materials and related costs.

VAT planning can be the difference between an average profit and a great profit on a project!

Incentives

Reliefs

Whilst property development is unlikely to attract a lovely research and development claim there is one government tax incentive- land remediation relief which all property developers need to be aware of and to consider on every project.

We wrote about it in more detail in our blog Asbestos? Contamination? When a disaster strikes there’s always tax relief!

Financing

Also make sure that you claim tax relief on all your financing.

Most property development companies will have had funding provided by the business owners.

Consider charging interest on your loans (there are tax breaks) and if any of the loans comes from personal loans look to see if you can tax claim relief on those loans.

Again these reliefs could be the difference between a project being viable and one which isn’t.

Group structures

Group structures can be a useful option, but they’re not for everyone.

They often appeal to business owners running successful trading businesses who are also interested in property development.

They can also suit individuals involved in multiple ventures or joint projects, where separating interests for commercial reasons makes sense.

A group structure with a separate property development arm allows profits from one business to fund property development.

This avoids distributing profits as dividends (and incurring dividend tax) or creating loans between businesses, which could be recalled if issues arise.

For example, a trading business generating £600K per year might allocate £300K annually to fund property development and investment activities.

We’ve discussed the pros and cons of group structures in a previous blog.

In the right circumstances, they can provide significant benefits.

Transforming Your Property Development Business

Success in property development starts with careful planning and a well-thought-out strategy.

In a previous blog, we shared insights into the 10 mistakes often made by property developers.

Avoiding these pitfalls can save you time, money, and stress.

Why Tax Planning Matters
Tax is one of the largest expenses for any business, particularly in property development.

Proactively managing your tax liabilities while minimising risks is crucial for sustainable growth.

Key Tax Considerations:

Consider whether you should trade through a company rather than trade as an individual.
Plan ahead for tax payments. Be aware of the pitfalls of accruals accounting inparticular the fact that land or a property bought for redevelopment is not an expense of the business until the development is sold.
Always consider VAT on every project to ensure opportunities are not missed.
Don’t overlook land remediation relief and interest on loans to maximise your claims against profits.
If you have excess cash in a company and want to use it for property development assess whether a group structure could benefit you.

Get in Touch

With over 30 years of experience, our property accounting experts have helped countless clients develop strategies and uncover opportunities to save tax.

To find out how Friend & Grant can support your property development business, book a discovery meeting or call us today to discuss your needs.

Our services

If you would like to find out more about some of our services relating to tax strategies for property developers please take a look at our related pages:

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