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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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.
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?
What's their alternative
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?
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.
Tell your client to engage an adviser that knows what they are talking about. You are a false economy.
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.
A few more things to consider
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.
Finance
@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.