If close the business and you apply Entrepreneurs Relief the you will pay 10% tax = £8,000
You will also get your CGT allowance of £11k deducted first.
Without Entrepreneurs Relief the tax would 20% or even more if the distribution was via dividends or salary. For unincorporated businesses the tax could be 20%, 40% or 45%!
What are the rules for ending a business?
The business has ceased.
The assets were in use at the time of cessation.
The business was owned for 1 year by the individual prior to cessation.
The assets were disposed of within 3 years of cessation.
The assets are not held as investments.
However, if you do the same thing within 2 years HMRC may consider that you are only doing this to gain a tax advantage and it could then be treated as income.
It doesn’t matter whether you have a partnership, an LLP or just have properties in your own name, provided you play an active role in managing your properties you could qualify for Section 162 Incorporation Tax Relief which will allow you to roll/hold over the capital gain into shares in your new company.
If you, either as an individual or in partnership, incorporate a business by transferring the business, together with all the assets of the business, in exchange wholly or partly for shares, you can defer some or all of the gain arising from the disposal of the ‘old assets’ (the business and the assets of the business) until such time as you dispose of the ‘new assets’ (the shares).
This relief is given automatically by Section 162 Taxation of Chargeable Gains Act 1992 provided the various requirements are met.
The key problem area is that Property Investment is generally not considered to be a Trade but because of the uncertainty created by recent legal cases you are able to ask HMRC for a Non-Statutory Clearance. This is effectively written approval from HMRC.
Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are
Industrial units
Offices and shops
Farmland and forestry
Public houses
Nursing homes
Hotels
Marine berth
The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.
If your business owns its premises or you have mixed property investments where you can title split to separate the commercial from the residential it could well be worthwhile to move the commercial property into a pension scheme (SIPP or SSAS).
The tax benefits are:
When you or your business contribute to your pension scheme the contributions are tax free – for individuals they will will get back tax at 20% and can claim additional tax relief on their self assessment return, for companies they can save 20% corporation tax
When the property is in the pension scheme there isn’t any tax on the rental income or capital gains tax if you sell the property
When you retire you could get 25% of your pension tax free
Other benefits include:
Your business could use cash tied up in the premises to invest in trading activities or for other investments
Pensions are normally outside of the scope of inheritance tax
It will ring fence your property from your other activities
In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:
Find a lender prepared to lend a third of the property value to your pension scheme (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
Have the premises independently valued and rent assessed and appoint solicitors
Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
Transfer into your SSAS or SIPP any funds you have in other pension schemes
As you are the business owner and its your pension scheme your business could make a payment into your pension scheme (pension contributions are tax deductible), the maximum for the last 3 years would be £120k (£40k + £40k + £40k) see details of NRE
You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
Then your pension scheme buys the premises from your business and rents it back to the business
Sections 21 and 22 explain the Assets which can’t be claimed and Section 23 lists items that can be claimed
Expenditure unaffected by sections 21 and 22
1. Machinery (including devices for providing motive power) not within any other item in this list.
2. Electrical systems (including lighting systems) and cold water, gas and sewerage systems provided mainly—(a) to meet the particular requirements of the qualifying activity, or (b) to serve particular plant or machinery used for the purposes of the qualifying activity.
3. Space or water heating systems; powered systems of ventilation, air cooling or air purification; and any floor or ceiling comprised in such systems.
4. Manufacturing or processing equipment; storage equipment (including cold rooms); display equipment; and counters, checkouts and similar equipment.
5. Cookers, washing machines, dishwashers, refrigerators and similar equipment; washbasins, sinks, baths, showers, sanitary ware and similar equipment; and furniture and furnishings.
6. Lifts, hoists, escalators and moving walkways.
7. Sound insulation provided mainly to meet the particular requirements of the qualifying activity.
8. Computer, telecommunication and surveillance systems (including their wiring or other links).
9. Refrigeration or cooling equipment.
10. Fire alarm systems; sprinkler and other equipment for extinguishing or containing fires.
11. Burglar alarm systems.
12. Strong rooms in bank or building society premises; safes.
13. Partition walls, where moveable and intended to be moved in the course of the qualifying activity.
14. Decorative assets provided for the enjoyment of the public in hotel, restaurant or similar trades.
15. Advertising hoardings; signs, displays and similar assets.
16. Swimming pools (including diving boards, slides and structures on which such boards or slides are mounted).
17. Any glasshouse constructed so that the required environment (namely, air, heat, light, irrigation and temperature) for the growing of plants is provided automatically by means of devices forming an integral part of its structure.
18. Cold stores.
19. Caravans provided mainly for holiday lettings.
20. Buildings provided for testing aircraft engines run within the buildings.
21. Moveable buildings intended to be moved in the course of the qualifying activity.
22. The alteration of land for the purpose only of installing plant or machinery.
23. The provision of dry docks.
24. The provision of any jetty or similar structure provided mainly to carry plant or machinery.
25. The provision of pipelines or underground ducts or tunnels with a primary purpose of carrying utility conduits.
26. The provision of towers to support floodlights.
27.The provision of—(a) any reservoir incorporated into a water treatment works, or (b) any service reservoir of treated water for supply within any housing estate or other particular locality.
28.The provision of—(a) silos provided for temporary storage, or(b) storage tanks.
29. The provision of slurry pits or silage clamps.
30. The provision of fish tanks or fish ponds.
31. The provision of rails, sleepers and ballast for a railway or tramway.
32. The provision of structures and other assets for providing the setting for any ride at an amusement park or exhibition.
33. The provision of fixed zoo cages.
Sections 21 and 22 do not apply to any expenditure to which any of the provisions listed in subsection (2) applies.
(2)The provisions are—
section 28 (thermal insulation of industrial buildings);
section 29 (fire safety);
section 30 (safety at designated sports grounds);
section 31 (safety at regulated stands at sports grounds);
As CATAX say in their video 9 out of 10 commercial building owners are not claiming these capital allowances!
The key reason why they aren’t claiming is because when you buy or develop a building the costs don’t tend to be broken down to show these items so you need to have them retrospectively assessed by a surveyor.
If you are buying a commercial property the CPSE will ask the seller about Capital Allowances. Sellers will need to pool their fixtures expenditure (even where they have not, nor do not wish to claim allowances themselves) unless they are prepared to risk the price of their property being chipped down in recognition that no allowances will be available.
Often at the time of Sale a Section 198 will agree the Capital Allowances
CAA01/S200 – S201An election under CAA01/S198 or S199 must be made by notice in writing to HMRC.
It should contain the following information:
* the amount fixed by the election,
* the name of each person making the election,
* information sufficient to identify the fixture and the relevant land,
* particulars of the interest acquired by or the lease granted to the purchaser; and
* the tax district references of each of the persons making the election.
The election is irrevocable.
The time limit for making the election is two years after the time when the interest is acquired by the buyer or the buyer is granted the lease.
A copy of the election must be included with each party's return for the first period affected by it. This will normally be the period in which the disposal or acquisition takes place.
The amount apportioned to the fixture must be quantified when the election is made.
Residential Rent is an Exempt Supply for VAT, however, Serviced Accommodation isn’t, its treated as Holiday Accommodation.
Holiday accommodation includes, but is not restricted to, any house, flat, chalet, villa, beach hut, tent, caravan, or houseboat.
If you supply holiday accommodation, or a site for such accommodation, you must account for VAT at the standard rate on any charges that you make regardless of the length of occupation or description of the charges.
The problem with VAT is that if you promote your serviced accommodation to the general public it will either make it 20% more expensive for them or reduce your profit!
So lets look at somethings that might help
VAT Registration
You can’t charge VAT unless you are registered for VAT and you don’t have to register until your turnover hits £85,000.
VAT taxable turnover is the total value of everything you sell that isn’t exempt from VAT.
You must register for VAT with HM Revenue and Customs (HMRC) if it goes over the current registration threshold in a rolling 12-month period. This isn’t a fixed period like the tax year or the calendar year – it could be any period, eg the start of June to the end of May.
VAT Flat Rate Scheme
There were changes to the VAT Flat Rate Scheme in April 2017 the changes are aimed mainly at low cost traders, we don’t know the full details yet.
A Low or Limited Cost Trader would spend less than 2% on gross turnover, or less than £1000 on the purchase of goods.
Assuming that the changes don’t affect Hotels and Holiday Accommodation, Flat Rate could save you VAT.
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
The Flat Rate for Hotels and Accommodation is 10.5%
Example
You bill a client for £1,000, adding VAT at 20% to make £1,200 in total.
You’re selling serviced accommodation, so the VAT flat rate for your business is 10.5%.
Your flat rate payment will be 10.5% of £1,200, or £126.
Separate Businesses
Provided there are commercial reasons why you should have separate businesses or companies, then each business would have the £83,000 registration threshold
The rules are set out in HMRC manuals and in this blog
Most deposits serve as advanced payments, and you must account for VAT in the return period in which you receive the payment. If you have to refund a deposit, you can reclaim any VAT you have accounted for in your next return.
Charities need to find ways to increase their income and many will explore Trading.
The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:
trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries) or is ancillary to carrying out a primary purpose of the charity
non-charitable trading turnover falls below the charity’s small trading turnover limit
trading activity is a VAT exempt fundraising event
If a trade doesn’t satisfy 1 of the above conditions, the profits of the trade won’t be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.
Primary purpose trading
A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).
Examples of such primary purpose trading include the:
provision of educational services by a school or college in return for course fees
holding of an exhibition by an art gallery or museum in return for admission fees
sale of tickets for a theatrical production staged by a theatre
provision of health-care services by a hospital in return for payment
provision of serviced residential accommodation by a residential care home in return for payment
sale of certain educational goods by an art gallery or museum
In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity.
Trading which is ancillary to the carrying out of a primary purpose
Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:
sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
provision of a crèche for the children of students by a school or college in return for payment
sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
sale by able bodied staff of items produced by the disabled in a disabled workshop
sale of confectionery, toiletries and flowers to patients and their visitors by a hospital
Trading which isn’t wholly charitable trading
Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:
a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which aren’t (promotional pens, mugs, tea towels, stamps, all postcards, etc)
the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity – ancillary) and the general public (non-beneficiaries – not ancillary)
the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% aren’t charitable beneficiaries
In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades – sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption
How does the small trading exemption apply?
The small trading exemption applies to the profits of all trading activities that aren’t otherwise exempt from tax, provided the:
total turnover from all of the activities does not exceed the small scale trading annual turnover limit
total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
profits are used solely for the purposes of the charity
Calculation of the annual turnover limit
The annual turnover limit is:
£5,000
if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000
Using a subsidiary trading company
You may find this useful if your charity:
makes profits on trading that’s not linked to its primary purpose
makes a profit that comes close to or is higher than the small trading tax exemption limit
wants to protect its assets from any trading losses
wants to have a separate organisation to carry out all its trading activities
Firstly, we all know there are many advantages to using a company for property investment.
The main driver has been the S24 Restriction of Mortgage Interest Tax Relief
2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayers its a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
Companies have many other advantages too:
Stamp Duty on Shares is 0.5% so if you own each property in a separate company you can sell the shares rather than selling the property
Holding properties in separate companies makes it easier for lender to take a charge over the business assets
Companies are better for Inheritance Tax Planning enabling the company shares to be given away in stages
Corporation tax is 19% and falling which means if you want to grow you portfolio you will retain more of the profit for re-investment
Those investors moving an existing portfolio will probably have to move all the properties to a single company in order to benefit from S162 Incorporation Tax Relief.
Let’s look at some of key points in more detail
Mortgages
At the moment company mortgages are probably 1% more expensive than individual Buy to Let Mortgages but that is is bound to change as more people switch to companies.
Lenders will probably want:
A Charge over the Property – these are legal charges registered at Companies House
A Debenture – these are charges over all the companies assets for example cash and rent arrears – this is fine if its one property per company but impossible if you have multiple properties and multiple lenders in a single company
A Personal (Directors) Guarantee – where you have a group structure a Parent (Holding) Company guarantee will probably be a good option if you have to give a directors guarantee you can insure against the risk of it being called in for example http://www.pgicover.co.uk/
The mortgage is with the company, so if you want to sell an investment I think buyers will be interested in buying the company as it avoids re-financing costs.
Bank Charges
Banks will charge for each account and companies need their own bank account, but generally the cost is low, for example
The Holding Company can provide management services to the subsidiaries and also recharge shared costs.
It can lend money and get dividends from the subsidiaries (this would be Franked Investment Income so its not double taxed).
The Holding Company could employ staff.
Accountancy
We offer deals to make this structure costs effective, I am sure other accountants will too. The subsidiaries should be cheaper to operate than the holding company.
Tax Simplicity
In addition to Residential Investments and HMOs you might have Rent to Rent, Commercial, Development and Serviced Accommodation, keeping these in separate companies makes it easier to deal with Tax and Risks, for example some might be VAT registered where as others might be Exempt.
Stamp Duty
SDLT on Shares is 0.5% but its much higher for buyers who buy properties.
Property Investment is probably one of the most complicated tax and accounting activities that exists, it can involve:
Stamp Duty (SDLT)
Income Tax
Corporation Tax
ATED
Capital Gains
And some activities also involve Pensions, Capital Allowances, VAT, CIS…. the list goes on and on
The internet is full of experts but often their advice is conflicting and some of the advice is actually wrong!
Experience gained from working with investors is the key to knowledge and continuous training and updating is vital. We have written hundreds of blogs on tax and accounting.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
The rules don’t apply to companies
I also think that having actual property and construction experience is beneficial.
Back in 2003, we started investing in property with a group of friends and colleagues.
We started by forming a limited company and our first purchase was 3 shops (eastern Eye, Maximum and LMJ) with 8 HMO’s above, there is a picture below
We then went on to buy 6 shops with flats above on long leaseholds, we did a title split and put 3 of the shops into SIPP Pensions
We then formed another company and purchased a block or 7 HMO’s.
We also bought an Office Block, Industrial Unit and Shops into SIPP and SSAS pensions.
We sold our investment in the companies and focused on commercial property investments in pensions.
