Investment Companies and Property Income

Property income: what has changed?

Changes are gradually being introduced that affect the way that landlords – particularly small buy-to-let investors – are taxed. Where landlords could once offset various types of spending against their rental income – for example, the mortgage interest element – the amount that can be deducted will be capped over the next few years, meaning that by 2020, 100 of financing costs will be given as a basic tax reduction. This, along with the alteration to the ‘wear and tear’ allowance, has caused many landlords to express concerns about the viability of running a property business as a sole trader.

What are the options?

In response to the changes, many landlords took hasty steps to set up a limited company to manage their rental income. Indeed, according to Countrywide, a fifth of rental properties are now owned by a corporation – the highest number since 2010 (which is when records began).

On the surface, it’s easy to see why this manoeuvre is attractive: the recent reforms are aimed at landlords paying tax on an individual basis, meaning that those operating via a company are exempt. Property income generated through a company is subject to the corporation tax rate; which, at 19 , is a much more attractive figure than the 40+ levied on higher-rate taxpayers. Mortgage interest is also considered a business expense and can be deducted from the company’s property income tax bill.

The process of setting up a company is not easy, however, and not every landlord is eligible to do so. Moreover, the complex rules governing property held within a company mean that different forms of tax are payable and fewer reliefs are available, which could lead to corporate landlords paying more tax – not less.

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How can we help?

Whilst the new charges can be avoided by setting up a company, there are various implications and potential pitfalls. Fortunately, IBISS & Co are experts in all forms of property taxation and accountancy; and, with expert accountants and certified tax specialists on hand to provide recommendations, we can devise a strategy that will best suit you and your business interests – and avoid the kinds of mistakes that could lead to unexpected tax charges.

Trading vs. investment companies: flagging up the risks

When it comes to property income, many landlords are unaware of the distinction between a trading company and an investment company – until it’s too late. Legislation stipulates that a company is a close investment holding company (CIHC) unless it exists for the purpose of:

Operating commercially as a business (i.e., carrying out a trade).
Making investments in land or estates.
Letting out properties or land. The exceptions to this are if the property will be let to individuals that are closely connected with the company (such as an employee or a relative of an employee).

As such, whilst a company that was formed with the purpose of letting a property to an unconnected party would not be classed as a CIHC, it is common for landlords to hold properties within a company that are then let to a separate trading company also owned by themselves – and this would mean falling within the CIHC rules, which could have major implications for property income businesses.

Other considerations:

Investment companies are presently subject to taxation at 19 and double taxation on disposal (corporation tax on gains and dividends tax on withdrawals from the company).
If you own the relevant properties prior to forming the company, you will need to ‘sell’ these to the new corporation – potentially incurring capital gains charges.
CGT reliefs (gift relief, roll-over relief, and entrepreneur relief) and business property relief (BPR) reliefs for inheritance tax are not available.
Finally, there are additional expenses, accountancy regulations and logistical pressures associated with running a company – not least the paperwork, which is more numerous and complex.

This is not to say that setting up a company is not the correct move for certain individuals; indeed, it may be a valuable move as part of a longer-term tax strategy. However, the complexities surrounding investment and trading companies means that it is crucial to seek expert advice before committing to a course of action.

When it comes to property income, there is no ‘one size fits all’ approach. At IBISS & Co, we treat every client with individual care and attention, utilising our accountancy expertise to formulate a bespoke approach that will mitigate tax liabilities and maximise profits. Contact an IBISS & Co certified tax specialist today to learn more about how we can help your business succeed.