is property owing company classed as an "investment company"

is property owing company classed as an ...

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Seem to be having a flurry of new clients with properties and - of course - the issue of buying the dwelling property in a limited company arises (to preserve the right to claim full mortgage interest relief).

My brain’s a bit befuddled right now and I’m not sure on one point. Hopefully you can help.

Is a company which owns and receives rents from a typical dwelling porperty classified as an "investment company" instead of a “trading company”?

Trading companies can claim tax deductions for all usual expenses but would the allowability of expenses for such a property company be restricted?

Furthermore, would such a property company be permitted to pay dividends as freely as trading companies to maximise the same tax advantages?

Thanks for any tips and pointers to aid my thinking. Much appreciated.

Replies (15)

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By pawncob
03rd Nov 2015 12:20

HMRC's def. of CICs

Does it qualify:

http://www.hmrc.gov.uk/manuals/ctmanual/CTM60710.htm

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By johngroganjga
03rd Nov 2015 12:25

Holding properties for rental income and capital growth is not trading.

An investment company can claim tax relief for its management expenses.

The question of trading or investment has nothing to do with what dividends a company can pay.

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Portia profile image
By Portia Nina Levin
03rd Nov 2015 12:52

The C word in this particular OP really bothers me.

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By taxinfo
03rd Nov 2015 13:52

Thanks for your replies.

Holding properties for rental income and capital growth is not trading but does that automatically classify it as an investment company?

Looking at the HMRC link I read that…..

 

A company is a “close investment company” unless……it exists wholly or mainly for ………..

b. the purpose of making investments in land or estates or interests in land in cases where the land is, or is intended to be, let to persons other than:

i) any person connected with the relevant company, or

ii) any person who is the wife or husband of an individual connected with the relevant company, or is a relative, or the wife or husband of a relative, of such an individual or of the husband or wife of such an individual.

 

Our latest client wants to buy a typical residential house and let it out in the usual way, on the open market, to unconnected third parties.

That definition from HMRC seems to indicate that his company, which will own and let out the property, won't be classified as an investment company and therefore won't have its deductible expenses restricted.

Or am I misreading something?

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Portia profile image
By Portia Nina Levin
03rd Nov 2015 14:21

Why does it frigging matter?

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By johngroganjga
03rd Nov 2015 15:04

You are overthinking. You are looking at the definition of a close investment company, which is a special type of investment company. They used to pay a higher rate of corporation tax, but not any more.

What restriction of deductible expenses are you concerned about? 

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By taxinfo
03rd Nov 2015 15:05

Sorry if I’m being unclear,

Sorry if I’m being unclear, Portia, but, from what I understand, there are several differences between the tax treatment of trading companies and investment companies.

For example, on investment companies -

No carry back of loss relief and carry forward is restricted.

The tax allowable expenses will be limited to those only required for investment management.

Inheritance tax Business Property Relief - Non-qualifying if a business is wholly or mainly engaged in investment activities.

So my client has expressed his concern that, if he goes ahead and forms a limited company to operate his new rental activity, his company may be classified as an investment company and encounter various restrictions not applicable to trading companies.

Obviously he wants to get full tax relief on all mortgage interest paid on the let property along with other usual expenses (agent's fees, repairs & maintenance, accountancy fees, property insurances, director’s remuneration and so on). He is concerned that, if the company is classified as an investment company, he might not necessarily get full deduction for all the expenses.

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Replying to OTOH:
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By awoodj
03rd Nov 2015 15:31

What's their alternative

taxinfo wrote:

Sorry if I’m being unclear, Portia, but, from what I understand, there are several differences between the tax treatment of trading companies and investment companies.

For example, on investment companies -

No carry back of loss relief and carry forward is restricted.

The tax allowable expenses will be limited to those only required for investment management.

Inheritance tax Business Property Relief - Non-qualifying if a business is wholly or mainly engaged in investment activities.

So my client has expressed his concern that, if he goes ahead and forms a limited company to operate his new rental activity, his company may be classified as an investment company and encounter various restrictions not applicable to trading companies.

Obviously he wants to get full tax relief on all mortgage interest paid on the let property along with other usual expenses (agent's fees, repairs & maintenance, accountancy fees, property insurances, director’s remuneration and so on). He is concerned that, if the company is classified as an investment company, he might not necessarily get full deduction for all the expenses.

He either holds personally and definitely won't get full interest relief going forward or puts it into a company as you suggest and yes it will be an investment company with the rules what apply to that type of company. And yes there are differences between trading and investment companies but if the company is carrying out investment activity then what does he expect it to be classified as, it's not a choice thing?

 

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By johngroganjga
03rd Nov 2015 15:13

Apart from directors' remuneration, which it would probably be unwise for your client to take anyway, all the expenses you identify should be allowable management expenses. So this is a non-issue. 

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Portia profile image
By Portia Nina Levin
03rd Nov 2015 15:21

Tell your client to engage an adviser that knows what they are talking about. You are a false economy.

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By girlofwight
03rd Nov 2015 21:18

Long term
Have you/your client modelled long term tax.

It seems to me that for a 'typical' client incorporating a letting portfolio, the savings from the unrestricted interest relief are a lot less than the potential double taxation on exit.

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Replying to nf1236:
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By awoodj
04th Nov 2015 09:12

A few more things to consider

girlofwight wrote:
Have you/your client modelled long term tax. It seems to me that for a 'typical' client incorporating a letting portfolio, the savings from the unrestricted interest relief are a lot less than the potential double taxation on exit.

Basing too much on modelling long term tax in regards to property investment at the moment is a risky business, very likely more changes will be coming in my opinion based on rhetoric coming from all parties.

Second point, have they made sure they can actually get a suitable mortgage in the Ltd. company, a single property landlord and a new company is not going to get very good terms if they can indeed get a mortgage at all. Likely to be higher rates and fee's as well as possibly only repayment rather than Interest only option available.

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By taxinfo
04th Nov 2015 09:12

That’s one of my thoughts too

That’s one of my thoughts too, girlofwight.

I have prepared a list of "pros" and "cons" as, in this case, I’m not sure the client realised all the other issues apart from simply achieving tax relief on the loan interest.

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By taxinfo
04th Nov 2015 09:20

@ajwood - you have just raised another point from my list.

Securing loan finance to acquire a buy-to-let is difficult enough as only a relative few lenders will oblige but, when trying to borrow for a buy-to-let owned by a limited company, he is likely to find only about half a dozen organisations willing to lend.

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Replying to Paul Crowley:
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By awoodj
05th Nov 2015 08:53

Finance

taxinfo wrote:

@ajwood - you have just raised another point from my list.

Securing loan finance to acquire a buy-to-let is difficult enough as only a relative few lenders will oblige but, when trying to borrow for a buy-to-let owned by a limited company, he is likely to find only about half a dozen organisations willing to lend.

Biggest factor will be experience, someone just starting out with one property will find getting finance in a Ltd. very hard. If you have an existing portfolio and proven experience it will be easier, you will then also have some of the banks who will lend to you on a commercial basis. Before planning too hard I'd look into this area as all the tax planning in the world won't help if you can't get lending.

Another thought, if they have an existing residence, they may be able to mortgage/remortgage and then lend the funds to the company, it's my belief (no doubt will be corrected if wrong) that this lending will be allowable as a personal tax deduction as you are lending to a Ltd company which then owns the property. The traditional way had been to remortgage your residence and then use funds to partly or fully fund purchase of a rental property but that will now start to fall under the interest tax restrictions.

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