26 Oct Buying real estate at golden brick can be great value – but what is it?
What is golden brick?
The term Golden Brick refers to a specific point in a development, when HMRC designates that a building has become ‘residential’ for tax purposes. Before this point, HMRC argue that a building could be either residential or commercial.
Residential is zero-rated for VAT purposes, but commercial isn’t. This makes a big difference!
There is no actual legal definition of ‘Golden Brick’, but it is generally accepted that it is the point at which the foundations have been finished and a Damp Proof Membrane (DPC) has been installed. The concept ‘Golden Brick’ came about when Housing Associations would pay developers for land that they were buying.
Due to the VAT treatment, developers could claim back the VAT for the infrastructure and Housing Associations would not have to pay VAT on the land. It was therefore the most tax-efficient point at which money could be transferred between the two.
Since it was generally a large lump sum, and since it occurred when the theoretical first brick was laid, then the term ‘Golden Brick’ came into use.
How is it relevant for you as a self-builder or a custom builder?
It’s less relevant for you as a self-builder if you are buying the land from a land-owner without any works being done. It’s more relevant if you are buying from a custom-build enabler or a custom-build developer.
In exactly the same way as Housing Associations buy from Developers, if you are buying a serviced plot, the developer will want to sell that to you at Golden Brick so that they can claim back VAT on any costs incurred in the infrastructure or preparation of the site. As explained above, the earliest that this can happen is the point at which HMRC designate that the building is residential not commercial.
The reason that you would want to buy a plot at Golden Brick rather than buying ‘off-plan’, is that you will pay stamp duty on the value of what you buy. In this instance, you will pay stamp duty on the land price only instead of the whole house, saving you thousands of pounds.
How does it work in practice?
On our site on Pound Lane in Essex, you have the option of buying the site at golden brick, and hiring us to build the shell home and then doing the fit out yourself.
Here’s an example of how the costs might differ.
1) You buy a completely finished home
If for the sake of argument the land cost £250,000, construction £200,000, and the fit out another £100,000, the finished home would cost £550,000, with a stamp duty payment of £17,500 (this does not include the current temporary £15,000 discount)
2) You buy a shell home and do the fit out yourself, the price for the shell home would be £450,000, with a stamp duty of £12,500. What’s more, because the shell home is still considered a new build, you would not need to pay VAT on the fit out.
3) You buy the land at golden brick at £250,000, and stamp duty would come to £2,500, giving you savings of £15,000 vs buying a finished home, and savings of £10,000 vs a shell home.