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!