When can my client company be liable to CT at small rate?

When can my client company be liable to CT at...

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New limited company client, shareholders of which are all members of same family, has historically had 2 investment properties earning rent of £50k.

During the year, one property has been sold and the proceeds used to embark on a property development project. Development unfinished at year-end.

Do these circumstances alter the CT rate for the ompany? If not, what would need to happen for the company to enjoy rhe diminishing benefits of the small company rate?

Thanks in advance for your help.

Replies (4)

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By Settingupalone
29th Nov 2011 08:50

Andy

Probably a silly question but why was the company deemed a 'Close Investment Holding Company' in previous years? Presumably some private use element of the properties or letting to a connected person?

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Replying to Democratus:
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By andy.partridge
29th Nov 2011 09:36

@ Settingupalone

Not a silly question at all. I am only getting to grips with the various strands of information myself which are coming to me piecemeal.

To answer, the shareholders live in a cottage on the site of the first property so you are right about the private use element. This is likely ot continue, so will that factor be critical even though the company is now engaging in a trade?

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By Settingupalone
29th Nov 2011 09:58

Not entirely sure and I hope someone will read and clarify this. Property development is deemed a trade and its profits taxed as trading profits i.e apply the normal limits. Whereas, property investment or rental is not regarded as trading for tax purposes and taxed as property income (i.e. under income from UK land and buildings). Normally small rate would be applicable but in your case due to the private element the company was deemed a close investment holding company.

So I think that the income and expenses from the property development may be taxed normally i.e small rates may apply.

However do wait for any further comments and clarification.

 

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By Steve Kesby
29th Nov 2011 10:57

All down to "purpose"

A CIHC is any close company except one that isn't.  A close company isn't a CIHC if it exists for the purpose of a qualifying activity; broadly a trade or letting of property to unconnected parties.

You have a company that is doing two things; one of which is the purpose of its existence.  You should argue that the purpose of the company's existence is for the carrying on of the new trade.  HMRC should argue that the purpose of the company's existence is the provision of the property to the shareholders, and the trade is mere side-effect.

Either you or HMRC will win.  Personally, at this stage, I'd back HMRC.

Sorry it's not more helpful, but "purpose" is a question of fact that may ultimately need to be decided by a court or tribunal.

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