Legality/Tax Consequences of Property Lettings

For a Tax Project - usage of Ltds in Property Lettings

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The UK property market continues to grow. Many individual property owners have taken advantage of Ltd company structures to invest, manage and let property with the effect (albeit not necessarily the purpose) of paying corporation tax and drawing dividends in favour of income tax.

A few typical examples...

1) Management - Mr Smith owns a property he wishes to rent out and receive an income. He incorporates a property management company to receive the rent, claim expenses, receives a wage for doing so below the basic tax threshold. Any profits after Corp tax he draws down as a dividend.

Isn't this widely used method across the UK a tax avoidance scheme? Why does HMRC tolerate this? Shouldn't a lease or trust exist between the individual and the management company or management fee payable?

2) Acquisitions - A Trade Co has built up a substantial amount of profits over the years for reinvestment. They form a separate Co (not a Hold Co) to acquire a property for which the Trade Co will carry out management and letting functions.

Once again shouldn't a lease exist between these two companies? Shouldn't a loan arise also between them in relation to the acquisition funds?

3) Leases - more generic question, I'm assuming any lease agreements should be for adequate consideration? The term peppercorn rent is thrown around a lot. While a lease at peppercorn rent is perfectly valid, I'm not sure such agreements hold weight to the taxman in relation this topic?

4) Loans - an individual or company loaning money for the purpose of acquisition would logically want to then write-off this debt. Again in the context of property lettings, does this really fly?

 

This is for a project and it would be great to get practitioner perspectives on these points. 

Perhaps my own understanding of this is off, but my initial feeling is that such actions have become common practice yet the legal and tax positions of these practices are incredibly vague (until the taxman comes around at least).

Replies (6)

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By Tax Dragon
06th Aug 2023 07:03

Use of companies is (imho) oversold. They are sometime appropriate, sometimes (actually very often) not.

A point I think you seem to be overlooking is ownership.

BTW is this still the same project you were working on in October?

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Replying to Tax Dragon:
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By Hugo Fair
06th Aug 2023 13:42

.

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By David Ex
06th Aug 2023 10:52

Tax law student wrote:

This is for a project and it would be great to get practitioner perspectives on these points. 

Perhaps my own understanding of this is off, but my initial feeling is that such actions have become common practice yet the legal and tax positions of these practices are incredibly vague (until the taxman comes around at least).

With respect, if you’re studying tax law (and have apparently been doing so for a number of years), you should be able to set out a clear description of the transactions and your suggested analysis of the tax consequences referencing the relevant legislation.

If you want to do that, I’m sure you’ll get some helpful input.

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By The Dullard
06th Aug 2023 11:51

Oh, my dear, you've delved into the intriguing world of property and taxes, and I must say, it's quite the tangled web! Let Auntie Edna shed some light on these matters for you:

Management - Oh, Mr. Smith seems to have concocted a clever little plan to dance around the taxman! While incorporating a property management company isn't inherently illegal, using it solely to avoid taxes might raise some eyebrows. HMRC does indeed keep a watchful eye on such arrangements. A lease or proper management fee could help solidify the arrangement's legitimacy and give it a more respectable air.

Acquisitions - Oh, a separate company for acquisitions, how industrious! It's not uncommon for businesses to have different entities for various functions. However, clear documentation, like leases and loans, is key to avoid suspicion from the taxman. Without proper agreements, it might look like they're trying to hide something behind those extravagant curtains!

Leases - Peppercorn rent, you say? Quite a charming expression, but HMRC may not be as captivated by it as we are! While peppercorn rent is indeed valid in some cases, it's crucial to ensure it reflects fair market value. Otherwise, it could attract the taxman's attention like a flock of seagulls after a chip!

Loans - Ah, loans and debts, the stuff financial dramas are made of! It's not uncommon for individuals and companies to lend money for acquisitions. However, you're right; writing off those debts should be handled with care and proper documentation. HMRC doesn't take kindly to creative vanishing acts with debts, darling!

You've touched on a rather delicate subject, my dear. These practices might be common, but as you've rightly observed, they dance on the fringes of tax legitimacy. The taxman's job is to keep the financial waltz in check, and sometimes they're not impressed with all the fancy footwork!

Always remember, my love, seeking professional advice from tax practitioners is the best way to navigate this glittering maze of property and tax. They'll ensure your moves are as elegant and above board as my own!

Now, off you go to dazzle in your project! And if you ever need a touch of fabulous guidance again, you know where to find me! Ta-ta! x

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By Hugo Fair
06th Aug 2023 13:48

I feel that OP's avatar byline (Student Kings College London) is a tad disingenuous.
After 2 years of postings (that started with a lot of rather basic VAT questions and have since morphed into a focus on property), OP said just before last Christmas:
"As this is a public post, I can confirm I am a tax law student, originally postgrad taught, now undertaking research in the area of VAT law relating to construction."

So no idea as to who commissioned that research (or 'project' as it has now become), but OP needs to start paying if advice is needed in depth across such a broad spectrum ... unless happy to pick up the subtle hints in brief notes from TD and others (which come from experience but are deliberately not specific to OP's 'scenarios').

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Replying to Hugo Fair:
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By David Ex
06th Aug 2023 15:29

Hugo Fair wrote:

I feel that OP's avatar byline (Student Kings College London) is a tad disingenuous.

Had a quick look and this is the only course currently offered by Kings that has the word “tax” in the title. Maybe I’ve not searched correctly for the OP’s course.

https://www.kcl.ac.uk/study/postgraduate-taught/courses/international-ta...

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