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.

Get In Touch!

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.

Next Step:

Please contact us if you need further advice, have any questions about our services, or would like a free consultation or a fixed quote.

Accountancy package - built around you

Sole Trader
Accounting

From £29.50 +VAT per month
The best service for:

  • Sole Traders
  • Self Employed
  • Additional Income Workers
  • Self Assessment
Ltd company
Accounting

From £71.50 +VAT per month
Perfectly designed and built for:

  • Contractors (including IR35)
  • Consultants
  • Freelancers
  • Ltd companies
Small & Growing
Businesses

From £196.50 +VAT per month
A premium fully-managed service:

  • Your own dedicated accountant
  • Your own dedicated bookkeeper
  • Payroll for up to 10 employees
  • Face-to-face video meetings

    5 star review  I instructed Ibiss and Co to handle my accounts for my two limited companies, one of which is a regulated law firm. I have been very happy and impressed with the service. The team at Ibiss and Co are very friendly and approachable and have the knowledge and expertise to ensure that the accounts were file properly and in time.

    thumb Aejaz Mussa
    7/11/2019

    5 star review  I took advice about company and personal tax, they guided me professionally and gave valuable advice. That really helped me. Always recommend IBISS & Co Ltd as best tax advisor.

    thumb saady4u
    6/24/2019

    5 star review  We have been using IBISS & CO Limited as our company’s accountant for last five years. A friendly and professional team always ready to assist. Always recommend for personal and business accounting and tax related advices.

    thumb Surrey Security Service -Operations
    6/24/2019
IBISS & CO Limited
4.9
Based on 7 reviews
powered by Facebook
Qamar Rehman
Qamar Rehman
2020-07-17T11:11:14+0000
Thank you Sufyan for all the support and excellent accountancy services you provided to us. Amazing team,
David La
David La
2020-07-04T11:44:54+0000
Professional firm. Provided very clear suggestions and recommendations. Thank you Muhammad
Dasha Slavinskaya
Dasha Slavinskaya
2020-04-24T16:31:27+0000
Happy to work with IBISS & Co team for more than two years now. VAT, profit and loss, payroll, pensions - all monthly,... quarterly and annually routine is trusted to professionals and always delivered with high standard. Any type of tax consultation is an advantage as well as ways for improvement offered.read more

IBISS & CO is the member of VouchedFor.co.uk, an online IFA directory and ratings portal. Clients can leave independent reviews on their financial adviser, and you can view our real time reviews at the following link.