Property Business Spotlight - Investment or Letting Companies
When it comes to property companies, there are various types, but the following four categories are considered to be the most important for tax treatment in the UK:
Property investment or letting companies
Property development companies
Property trading or dealing companies
Property management companies
Why does it matter?
For tax purposes, the specific type of property business carried out by a company has a relatively minor effect on how the company itself is taxed. However, it has a more significant impact on the owner of the company because certain Capital Gains Tax (CGT) and Inheritance Tax (IHT) reliefs depend on the type of company.
It's important to note that individuals who are not using a company are taxed differently depending on the type of property business they're involved in. This means that the tax position of an individual investor differs significantly from that of a company investor, depending on the type of property business.
Therefore, it's crucial to understand the type of property business you have to determine if forming a company is suitable for you. Let's focus on property investment companies, also known as property letting companies.
In this blog, we will focus only on property investment companies.
Property investment companies primarily hold properties as long-term investments. These properties are considered fixed assets of the company and are rented out to generate rental income. Although the company expects capital growth, short-term property sales should generally only occur for valid commercial reasons, such as an anticipated decline in value in a specific location or a need to raise funds for other investments.
Example
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Example 〰️
Let's consider a company called Property Heaven Ltd that purchases three properties.
They sell one property immediately after completion to raise funds for expansion, while the other two properties are rented out for several years. Even though All Blacks Ltd sold one property quickly, there was a valid commercial reason behind it. Therefore, the company can still be classified as a property investment company.
In general, property investment companies hold properties for the long term, and short-term sales for quick profits are exceptional. However, if exceptional opportunities arise for short-term gains, it's reasonable for the company, like any other investor, to take advantage of them.
Property letting businesses can have varying degrees of involvement from investors in the day-to-day operations. Some investors have minimal involvement, while others are more hands-on. As long as the company meets the overall criterion of long-term investment, it remains classified as a property investment company for tax purposes, regardless of the level of investor involvement.
It's important to note that managing your company's own properties does not automatically make it a property management company.
Tax treatment of Property Investment companies
From a tax perspective, property investment companies are not considered trading companies. This has some unfortunate consequences for the company owner:
The shares in the company are not eligible for business asset disposal relief or holdover relief for Capital Gains Tax (CGT) purposes.
The shares in the company are not eligible for business property relief for Inheritance Tax (IHT) purposes. This means that the full value of the company would be included in the investor's estate for calculating IHT upon their death.
Property investment companies account for rental profits under specific rules for property income.
Interest and finance costs are not treated as part of the rental business.
Tax Tip:
Furnished holiday lets enjoy special tax status. Although companies deriving most of their income from furnished holiday lets are still considered property investment companies for various purposes, shares in such companies remain eligible for certain tax reliefs, such as business asset disposal relief and holdover relief. Business property relief for Inheritance Tax purposes may also be applicable in rare cases.
