I have a client who is planning to buy a furnished holiday letting (no mortgage, brought through own savings) and wants to trade it through a limited company as opposed to personally. I am obviously aware of the differences between paying Self-Assessment tax and National Insurance on the FHL personally or Corporation Tax as a limited company. I am also aware of the differences in capital gains tax between a limited company or personally when they decide to sell it in the future.
However, are there any specific accounting or tax treatments that differ if the FHL is traded through a limited company compared to the standard treatments if the FHL was personal?
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Off the top of my head I can't see any reason why the taxable profits of the company would not be the same as the client's own taxable profit if he held the property personally.
The accounting treatments might well differ of course, as the company's accounts will be governed by the Companies Act and, presumably, the FRSSE, whereas the client could do what he wants in his own accounts.
Some thoughts from HMRC
I quote from HMRCs guidance on FHLs.
Probably the main issue is CGT relief
Profit from properties that meet the qualifying tests for FHLs is taxed following the rental business (property income)calculation rules.
However, FHLs are treated as trades for some tax purposes and therefore have some tax advantages over other lettings. The advantages under the special rules are:
• entitlement to plant and machinery capital allowances on furniture, furnishings, etc. in the let property, as well as on plant and machinery used outside the property (such as vans and tools)
• Capital Gains Tax (CGT) reliefs for traders – Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders
• profits count as earnings for pension purposes.
VAT / Capital gain
The only advantage that I can see is from a VAT viewpoint.
EXAMPLE: if a Sole Trader had a VAT registered business then the rental income (being holiday lets) would be liable to VAT if held in that sole trader's own name - however putting it in a separate legal entity Ltd Co as stated would keep the rental income out of the scope of VAT (unless on it's own exceeds VAT reg'n limit). Further, if a sole trader had turnover of £ 75,000 from his trade and was NOT VAT registered then if the holiday let turnover was say £ 10,000 then VAT registration would become necessary as combined turnover over VAT reg'n limit - avoidable by (NOT artifical) separation. A partnership / joint ownership of the property could achieve the same result and at the same time avoid the extra costs of iXBRL filing and RTI reporting plus however many extra hundreds of pounds Ltd Co accounts cost annually.
CAPITAL GAIN (could be better / might not be better depends upon how long held and use of ER)
In a Ltd Co indexation at RPI is added to costs and deductable from future sales proceeds. With individuals this indexation does NOT apply. With individuals the annual unused examption can be used against the gain (so, good to have two individuals as joint owners as two Annual Exemptions available).
Ask the client
Did you ask the client why they want a Ltd company? It would be useful if you ask them to explain their thought process. I frequently find clients think they want to do something based on a misconception.
I suggest you do a projected P&L account for the property and calculate the tax bill under each scenario, company, personally, maybe in joint names with their spouse. Factor in the additional costs of running a company, accounts tax, filing fees, auto enrolment, all will play their part.
Look also at the financing. Any mortgage interest will be tax deductible, if they have any borrowing say a on their own house, it would be better to clear this with the funds available and borrow to fund the FHL.
Personal occupation can be tricky if the FHL is in a company with BIKs. If held privately you simply restrict the relevant fraction of the overhead costs for that year, which could be minimal.
No Class 4
FHLs are treated as a trade for certain purposes; loss relief, pension relevant earnings and capital gains tax.
However the profits are still charged to tax under part 3 of ITTOIA 2005.
For there to be a liability to Class 4 NIC SS(C&B)A 1992, s 15 requires that the profits be charged to tax under part 2 of ITTOIA 2005.
to add to SK
if you sell property in Ltd Co, then no annual exemption....the money would then need to be extracted via dividend or capital distribution (had the property been held personally Entrepreneurs Relief would have applied. However, the tax saving per year is £1,000 max per year...but this is before the cost of running/operating through a ltd co....notwithstanding the other issues already mentioned.
FHL thru Ltd Co.
This is good stuff. Note that Class 4 NI appear to be free on PROFITS below 8K for 2015/16.
Note that PROFITS should be much lower than your turnover with the substantial expenses that will be incurred compared to a standard residential let. (Property visits, replacement consumables etc).