The property sector is currently facing numerous challenging pressures, including supply chain issues, rising fuel costs, and potential taxation changes.
It is crucial to stay alert to tax issues, especially concerning Single Purpose Vehicles (SPVs).
SPVs and tax
Many property investors and developers opt for Single Purpose Vehicles (SPVs) to manage their investments and development projects.
An SPV is a separate legal entity, often a company, created to hold and manage a specific property or a small portfolio of properties. Using SPVs offers advantages such as risk mitigation and funding flexibility.
By isolating each property or project within its own SPV, investors and developers can limit the potential impact of financial or legal issues to that specific entity, safeguarding their overall investment portfolio.
SPVs also allow for greater flexibility in accessing funding, as each entity can have its own financing arrangement. This reduces reliance on a single funding source and enables negotiation of favourable terms.
Additionally, SPVs facilitate share purchases or sales, making it easier to transfer ownership or attract new investors by buying or selling shares in a particular entity.
However, it’s important to consider the varying profit patterns associated with SPVs. Property investors typically generate steady, albeit low, profits from rental income, while developers experience more volatile profit patterns tied to the development and sales cycle.
These patterns can complicate tax planning, especially in light of proposed changes in corporation tax rates. Careful analysis, professional advice, and consideration of all relevant factors are essential for individuals operating SPVs to make informed decisions.
Impact of tax year-end
One important factor to consider is the impact of the year-end date on taxation.
Despite calls to reverse the decision, the government did increase corporation tax rates from the long-standing low of 19% to 25%.
The new rate became effective for profits earned after 1 April 2023. Due to this, companies with financial years crossing the 1 April 2023 threshold would need to apportion their profits based on time.
For example, a company with a year-end of 30 September 2023 would have 6/12ths of its profits taxed at the higher rate and the remaining 6/12ths at the old rate, regardless of when those profits were actually earned.
This apportionment works well for businesses that generate profits evenly throughout the year, such as property investors with rental income.
However, it can pose challenges for developers who, for example, made unit sales in January or February 2023.
In such cases, they would be taxed at a higher rate than the previous 19% that applied when the sales were made.
Conversely, in the first year of the tax rate change, selecting a strategic company year-end could potentially reduce the overall tax rate.
However, it is crucial for individuals considering this strategy to seek proper advice and consider all relevant factors, not just the tax implications.
How we can help
At Williamson & Croft, we support an eclectic mix of businesses and private individuals across several sectors with a wide range of services to ensure compliance with statutory and financial reporting.
Our goal is for you to have the necessary advice to make an informed decision on your tax affairs, ensuring that they are as efficient as possible, while remaining fully compliant.
Our team provide clear, concise advice and aim to mitigate the stress and risks of operating a business as much as possible.
Contact us today to find out whether a change in year-end could benefit your business.