CIHC & Associated companies

Double whammy of tax?

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We have a client who is the 100% shareholder of 2 companies (A Ltd and B Ltd). A Ltd is a trading company with a profitable trade. B Ltd owns a property (assume no mortgage on the property) which it rents on a commercial basis to A Ltd.

 

For ease, let's say that A Ltd has a taxable profit in the 12 months to March24 of £100,000. B Ltd has a taxable profit in the same period of £24,000.

 

As we understand, B Ltd is a Close Investment Holding Company (CTA 2010 s18N) because it rents to a connected person and this therefore doesn't qualify as a commercial let (even though it is at a commercial rate!). B Ltd would therefore be paying tax at 25% on the £24,000 of profit.

 

Under CTA2010 s18E-s18F, it would appear that A Ltd and B Ltd are associated companies. As such, the thresholds for corproation tax are halved, and A Ltd would have a small rate threshold of £25,000 and a main rate threshold of £125,000. A Ltd is therefore paying 19% on £25,000 and 26.5% on the remaining £75,000.

The total tax of A Ltd and B Ltd would be £24,625 (A) + £6,000 (B) = £30,625.

There's therefore a "double hit" - A Ltd has reduced thresholds, whilst B Ltd is paying 25% regardless.

 

Furthermore, if B Ltd stops charging the rent to A Ltd, B's profit would fall to £0 (and it would effectively become dormant) whilst A's profit would increase to £124,000. However, because B would be dormant, then there would be no associated companies for A, and the thresholds would increase to £50,000 (small rate) and £250,000 (main rate).

The tax would be £50,000 x 19% (£9,500) + £74,000 x 26.5% (£19,610) giving total tax of £29,110.

So they save £1,515 just by ceasing any sort of rent between the two entities?

 

Is this correct? Does a CIHC affect the thresholds for small and main rate, and the associated company rules?

Is there something we have missed?

 

Thanks in advance for any responses.

 

Replies (6)

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Ivor Windybottom
By Ivor Windybottom
10th Jun 2024 14:59

HMRC says in
https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60770 that
"Broadly Section 18N (2)(f) excludes from being a CIC a company which can show that it exists for the purpose of trading companies in the same group."
In effect, while a company letting property to another group company is not excluded from being a CIHC, if it uses the property for the other group company's trade then it may escape from being a CIHC. It is fact dependent.

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Replying to Ivor Windybottom:
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By calvinplummer
10th Jun 2024 15:07

This is not a group situation. I believe the original poster is correct in his interpretation

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Replying to calvinplummer:
Ivor Windybottom
By Ivor Windybottom
10th Jun 2024 15:11

Oh yes - must read question more carefully!

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By Paul Crowley
10th Jun 2024 15:25

This is another one of those unforeseen problems of having property in companies.

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Replying to Paul Crowley:
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By nrw2
11th Jun 2024 09:01

Paul Crowley wrote:

This is another one of those unforeseen problems of having property in companies.

And another foreseen problem of gov's constant change of policy and layering of complexity, making it very hard to plan / invest in the future in this country!

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By Tax Dragon
11th Jun 2024 10:10

Presumably A continues to occupy B's property on a commercially active lease (one which, for example, makes A responsible for outgoings in relation to the property - else where are those costs saving tax?)

Stopping rent on top of that obligation may not be sufficient to bring B's property business to an end.

If not, B continues to be associated with A.

Thus the suggested 'solution' to the 'problem' may not work. But OP's analysis of the 'problem' itself seems sound.

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