Property development and tax structures

Client A recently asked me for advice on this…

A planned to set up a company, A Ltd. The company is being set up specifically to undertake a property development. The anticipated profit is £200,000. A is a higher rate taxpayer and would have paid £82,000 tax and NIC on the profits arising had he undertaken the development personally. By using A Ltd the tax on the profit reduces to £40,000. If this is reinvested in the next project that is a tax saving at this stage of £42,000. However, if the funds are extracted as capital (by way of, say, a liquidation) this will, after April next year, be taxed at an effective rate of 18% (rather than 10%). The overall tax charge, through the use of the company rises to around 37%. There is still a tax advantage in using a company but the overall costs need to be weighed up as well as the commercial considerations.