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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.

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.

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