Company Trading Vehicle for Property Developers
Reinvest more profits
Most developers trade through a limited company, primarily because company profits that remain undrawn can be reinvested in the next project having only suffered 20% tax, whereas the owners of an unincorporated business might pay up to 45% + NI, and therefore have less left over to re-invest.
In some cases it may be possible for developers to improve on that position if they can access the ‘Substantial Shareholder Exemption’ (SSE) available to companies.
Broadly, SSE can exempt the profit made when Company A disposes of shares in Company B, if Company A has at least a 10% interest in Company B and has held that interest for a continuous twelve-month period beginning not more than two years before the disposal. There is no requirement for the proceeds of the sale of the shareholding to be used in any particular way.
Company A acquires 25% of the share capital of Company B for £500,000. Company B builds some houses. Company A sells its shares Company B and makes a profit of £250,000. The sale qualifies for SSE and the gain is therefore exempt from tax, so Company A can re-invest the whole £750,000 proceeds in the next project.
SSE legislation is complicated, so you if you are hoping to benefit from the exemption, you should take advice before embarking on the venture.