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Corporation tax help please

Company making property investment

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Good morning, 

I would really appreciate any ideas, thoughts, suggestions regarding a client’s situation: 

Husband and wife have a company called X Ltd. Normally the company’s income is from IT contracting and HR work. There had been, until recently 1 residential flat which is owned by X Ltd and rented to (not connected) individual at MV.

 Approx. 3 years ago X Ltd purchased a large property which has been substantially renovated via X Ltd and 50% of the property is now used as a B & B. The remaining 50% of the property is occupied by the directors and family of X Ltd.   

 However, the problem is that the B & B is operated by the husband & wife’s second company Y Ltd. A MV annual rent is paid to X Ltd for the rent of the whole property. The directors pay 50% of the annual rent back to company Y Ltd (at MV to avoid BIK) for the private use of the 50% the director’s and family occupy. 

My concern is that because the properties (The flat and the B & B) are not part of X Ltd’s  trade, the interest paid by X Ltd on the loans to finance the purchase and renovation of the property are only allowable against the rents received from flat and the B & B property.  This is creating a large loss meanwhile CT is due to be paid on X Ltd’s trading profit, i.e. the IT and HR work.

 The renovation and continual maintenance costs have been substantial and exacerbate the tax relief problem for the B & B  property and, X Ltd has purchased all the fixtures & fittings, soft furnishings etc. for the B & B and is expecting to receive capital allowances on these costs.

 I think it would be best, and correct, in order to utilise the costs of the B & B with X Ltd if the B & B activities are moved to X Ltd and Y Ltd is dissolved.

 Can anyone help with a better way forward or see the flaw in my thinking please?

Any thoughts, comments, suggestions welcome!  

 Thank you

 

Replies (10)

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By Ruddles
26th Sep 2017 10:49

So - you've got profits from a trade and non-trade loan relationship deficits in X Ltd? What is the problem again?

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Replying to Ruddles:
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By Problematic
26th Sep 2017 11:17

The problem seems to be a huge gap in my understanding of CT.
Tax is being paid by Y Ltd on the profits from B & B as there are no maintenace or finance cost or even CAs to set against the income as Y Ltd only pays the rent. Meanwhile X Ltd is sitting with a costly investment on which it has insufficient income (rents) to relieve its outgoings. Apologies for being thick here.

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By Ruddles
26th Sep 2017 11:26

The point is that the deficits arising in X (non-trade deficits, property losses (eg excess capital allowances)) can be set against X's trade profits. Or are you saying that those trade profits are insufficient?

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By Problematic
26th Sep 2017 11:53

The profits from the trade are sufficient but my thinking was that the rental income derived from the properties has to be calculated separately as it is not a trade. Consequently, if the rental income less expenses creates a loss it can't be set against the trade just as a capital gain within a company cannot be reduced by a trading loss....or am i completely wrong on all of that?

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By Problematic
26th Sep 2017 12:37

Ah, legislation has changed so from 1st April 2017 so that losses of any kind can be relieved agains other profits within the company? So I now understand your original comment but as it does not apply prior to 31st March 2017 I I still have the problem of taxed trading profits. Is this correct ? Thank you for your contribution.

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By Ruddles
26th Sep 2017 15:35

No it is not correct. And, to be blunt, if you do not realise that non-trade deficits and property business losses have always been capable of sideways offset against other income and gains of the same period you should not be advising company clients.

Your (mis)understanding of the use of trade losses against capital gains is also worrying.

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By Problematic
26th Sep 2017 13:54

Thank you for your reply and your rebuke. Fortunately I am not advising clients but was asked a question and I offered to investigate whilst making clear that I am not confident. I do recognise that it is a challenge to be an expert in all areas of tax and have never claimed to be so which is why I posted on this site. In my favour, I at least embarked on a thought process to check the situation, albeit unnecessarily.
I have since found the relevant para in HMRC manuals!
Thank you for your advice.

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By kaff
26th Sep 2017 18:19

The B&B is quite likely to be considered a trade in any case (although the residential flat rental won't be).

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Replying to kaff:
By Ruddles
26th Sep 2017 19:30

That's not the point though, is it. The B&B property is rented by X to Y, so it is a rental business in X's hands. Not that it makes much difference to the analysis.

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By kaff
26th Sep 2017 22:25

Sorry, good point. I'd not read the post properly (trying to read AWeb on a phone while travelling).

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