The 10-Year VAT Rule – When Can an Old Residential Building Become a Non-Residential Conversion?

How historic residential use, conversion timing and the first sale can determine whether a property developer qualifies for 0% VAT

By Steve Bicknell FCMA, CGMA

You buy a former residential property that has been used as offices for many years.

You intend to convert it back into flats.

Can the first sale of those flats be zero-rated for VAT?

Potentially, yes.

One of the most interesting provisions in UK property VAT legislation is the 10-year VAT rule.

It can allow a building originally designed or used as residential accommodation to be treated as non-residential for the purposes of a qualifying conversion.

That matters because the first qualifying sale or long lease of the converted property may be zero-rated for VAT, potentially allowing the developer to recover substantial input VAT.

However, there are several important conditions.

The 10-year period is not necessarily measured from the date building work starts. Commercial occupation does not prevent relief. Occasional residential use can be problematic. And where a building contains both commercial and residential accommodation, the position becomes considerably more complicated.

Let’s examine how the rules work.

Quick Answer – What Is the 10-Year VAT Rule?

Under Value Added Tax Act 1994, Schedule 8, Group 5, Item 1(b) and Note (7), a building previously designed or adapted for residential use can potentially be treated as non-residential for the purposes of a qualifying conversion.

Broadly, the building must:

Have been constructed more than 10 years before the relevant grant of a major interest.
Not have been used as a dwelling or for a relevant residential purpose during the 10 years immediately preceding that grant.

Where those conditions are satisfied, the first qualifying sale or long lease following conversion may be zero-rated.

However, the developer must also meet the other statutory requirements, including the qualifying dwelling conditions, person-converting status and the rules concerning the first grant of a major interest.

The important distinction is that the test concerns historic residential use, not simply whether the building has been empty.

HMRC explains the rules in VAT Notice 708 – Buildings and Construction, section 5.

Why Does the 10-Year Rule Matter?

Ordinarily, the sale of an existing residential property is exempt from VAT.

Although no VAT is charged to the purchaser, the seller generally cannot recover input VAT directly attributable to an exempt sale.

A qualifying zero-rated sale is different.

Zero-rating is a taxable supply, even though VAT is charged at 0%.

This can allow the developer to recover input VAT attributable to that taxable activity, subject to the normal VAT recovery rules.

	Exempt residential sale	Zero-rated first grant
VAT charged to purchaser	None	0%
VAT classification	Exempt	Taxable
Input VAT recovery	Normally restricted	Potentially recoverable
Typical transaction	Sale of an existing dwelling	First qualifying grant following conversion

Example – Why the Difference Matters

Suppose a developer incurs:

Development expenditure	VAT
Professional fees	£12,000
Building materials and other costs	£18,000
Other taxable expenditure	£5,000
Total VAT incurred	£35,000

If the eventual disposal is exempt, recovery of the VAT directly attributable to that sale will normally be restricted.

If the disposal qualifies for zero-rating, the developer may be entitled to recover the £35,000, assuming the expenditure is properly attributable to taxable supplies and the normal recovery conditions are met.

The VAT classification of the eventual sale can therefore make a £35,000 difference to the project.

THE ROLLING 10-YEAR TEST
2016 — Last residential use
2026 — Conversion begins
2027 — First qualifying sale: potentially 0% VAT

Example 1 – A Former House Used as Offices for 15 Years

Suppose a company purchases a large Victorian house.

The building was originally used as a family home.

However, it was converted into offices in 2010 and has been used exclusively as offices ever since.

The company purchases the property in 2026 and converts it into four self-contained flats.

It intends to sell the flats on qualifying long leases.

Because the building has not been used as a dwelling for more than 10 years, it may qualify as a non-residential building for these VAT purposes.

Assuming all the other statutory conditions are satisfied, the first qualifying grants of major interests in the flats may be zero-rated.

The building’s original residential history does not automatically prevent zero-rating.

This is the principal benefit of the 10-year rule.

What Counts as a Major Interest?

For the purposes of these VAT provisions, a major interest generally means:

Location	Qualifying interest
England, Wales and Northern Ireland	Freehold, or a lease exceeding 21 years
Scotland	A qualifying long lease of at least 20 years, or the relevant ownership interest

An ordinary six-month or 12-month residential tenancy is not a major interest.

For example, a developer converting an office building into six flats might grant 125-year leases.

Provided the statutory conditions are satisfied, each first qualifying lease may be zero-rated.

However, granting short residential tenancies normally produces exempt rental income rather than zero-rated supplies.

This distinction is particularly important where a developer initially intends to sell but subsequently decides to let the completed flats.

What Counts as Residential Use?

HMRC takes a broad approach to what constitutes residential occupation.

A building is used as a dwelling where it has been designed or adapted for use as someone’s home and is actually used in that way.

Importantly, accommodation does not need to be:

Fully self-contained.
Of modern construction.
In good condition.
Separately assessed for council tax.
Occupied as someone’s principal residence.

Examples of residential accommodation can include ordinary houses and flats, bedsits, basic living accommodation above shops, and accommodation occupied by publicans or caretakers.

What about relevant residential purposes?

The legislation also refers to buildings used for a relevant residential purpose.

This includes certain forms of institutional accommodation, such as qualifying care homes, student accommodation and other specified residential establishments.

A building may therefore have a residential history for VAT purposes even though it was never used as an ordinary private house.

The precise statutory definition must be considered.

What does the case law tell us?

Tribunal decisions illustrate why the actual use of a building matters.

In G Tobell (VTD 16646), bedsit accommodation above a public house was treated as residential accommodation.

In Amicus Group Ltd (VTD 17693), bedsits with shared facilities were treated as residential because they were used as people’s homes.

In N & J Hicking (VTD 17117), a dilapidated farmhouse remained residential despite its poor condition and a closing order.

These cases demonstrate that basic, shared or substandard accommodation can still constitute residential use.

A building does not cease to be residential merely because its accommodation is outdated or unsuitable by modern standards.

Does the Building Have to Be Empty for 10 Years?

No.

This is one of the most common misunderstandings.

The 10-year rule is not simply an empty-property relief.

A building can have been occupied commercially throughout the relevant period and still qualify.

For example, a former house might have been used continuously as an office, clinic or business premises for 15 years.

The building has not been empty.

However, if it has not been used as a dwelling or for a relevant residential purpose during the relevant period, it may still qualify as non-residential for the conversion rules.

Conversely, a building that has stood vacant for many years does not automatically qualify.

Its historic residential use, construction date and the other statutory conditions must still be established.

The test is the absence of qualifying residential use, not the absence of occupation.

When Does the 10-Year Period Start and End?

For the first qualifying sale or long lease following a non-residential conversion, the relevant period is generally the 10 years immediately preceding the grant of the major interest.

This is particularly important because the developer may begin conversion work before the full 10 years have elapsed.

The qualifying sale or long lease must, however, take place after the relevant period has been satisfied.

HMRC expressly recognises this in VAT Notice 708.

Where the developer genuinely intends to make a qualifying zero-rated sale after the 10-year point, associated input VAT may be recoverable under the normal rules.

If that intention subsequently changes, adjustments may be required.

Example 2 – Conversion Begins Before the 10-Year Point

Suppose a former residential property was last used as a dwelling on 31 December 2016.

It has been used exclusively as offices since January 2017.

A developer purchases it in July 2026.

Conversion work begins in September 2026.

The completed flats are sold in March 2027.

Although the conversion work began before the full 10-year period had elapsed, the first grants take place more than 10 years after the last residential use.

Assuming the other statutory conditions are satisfied, those grants may qualify for zero-rating.

The relevant date for this relief is the first qualifying grant, not necessarily the commencement of conversion works.

Example 3 – A Building Empty for Nine Years

Suppose a residential property was last occupied as a dwelling in December 2017.

It has remained vacant since then.

A developer purchases it in October 2026 and intends to convert it into apartments.

The completed flats are due to be sold in June 2027.

At that point, the property will have been free of residential occupation for less than 10 years.

The 10-year route to zero-rating would therefore not be available for a grant in June 2027.

However, if the first qualifying grants take place after the relevant 10-year period has elapsed, that condition may then be satisfied.

This is because the statutory test is a rolling 10-year test.

A later disposal can therefore change the VAT position.

Of course, the developer must still satisfy every other condition for zero-rating.

The commercial implications of delaying completion should also be considered.

What If Only Part of the Building Was Used Residentially?

This is an important restriction.

Under the statutory test, residential use of any part of a building during the relevant 10-year period can prevent the whole building from qualifying.

For example, suppose a three-storey building comprises:

A shop on the ground floor.
Offices on the first floor.
A flat on the second floor.

The flat has been occupied residentially throughout the previous 10 years.

The developer cannot simply argue that the whole building is non-residential because most of it was used commercially.

The existing residential occupation must be taken into account.

However, the position may differ where the qualifying grant relates to a distinct part of the building.

Where a grant is of part only, the statutory test must be applied to that part.

This creates an important distinction between:

A grant of the entire converted building.
A grant of a separately identifiable qualifying part.

The legal boundaries, previous use and nature of the conversion must all be examined.

It is not sufficient to calculate the proportion of the floor area that was commercial and assume the same proportion of the eventual sale qualifies for zero-rating.

MIXED-USE PROPERTY VAT TRAP
DOES EXISTING RESIDENTIAL USE PREVENT ZERO-RATING?

Mixed-Use Buildings – The Additional-Dwelling Rule

Mixed-use properties create some of the most difficult VAT questions.

A typical example is a public house with residential accommodation upstairs.

Suppose the public house has traded for 20 years and the landlord has lived above the bar throughout that period.

The developer purchases the property and converts it into residential accommodation.

Can the sale be zero-rated?

The answer depends on the precise conversion and the statutory conditions.

Where a building already contains residential accommodation, the legislation includes provisions concerning the conversion of its non-residential parts.

In particular, Note (9) to Group 5 addresses certain conversions of non-residential parts of buildings that already contain residential accommodation.

The creation of additional dwellings is an important consideration.

Example 4 – Pub Converted Into One House

A two-storey public house has a bar downstairs and the publican’s living accommodation upstairs.

The developer converts the entire property into one large house.

Although the ground floor was previously commercial, the building already contained residential accommodation.

The conversion has not created an additional dwelling.

The developer should not assume that the first sale qualifies for zero-rating as a non-residential conversion.

Example 5 – Pub Converted Into Three Flats

Now suppose the same building is converted into three separate flats.

The ground floor was previously commercial, while the upper floor contained existing residential accommodation.

The conversion creates additional dwellings.

There may be scope for zero-rating under the mixed-use conversion provisions, but the precise treatment depends on the layout, the parts converted and the interests being granted.

It is essential to identify which new flats incorporate previously residential accommodation and how the statutory conditions apply.

The Upper Tribunal considered related issues in Revenue and Customs Commissioners v Languard New Homes Ltd; DD & DM MacPherson v Revenue and Customs Commissioners [2017] UKUT 307 (TCC).

Creating additional flats does not automatically make every sale zero-rated.

Mixed-use conversions should be reviewed before the purchase is completed.

What About Occasional Residential Use?

Occasional occupation can prevent the 10-year condition from being satisfied.

For example, suppose a former house has been largely vacant for 12 years.

However, the owner occasionally stays there at weekends.

The building remains furnished and is used as a second home.

That use may constitute residential occupation.

The property does not necessarily qualify simply because nobody lives there permanently.

The same concern can arise where accommodation is used informally by staff, owners or family members.

Any genuine use as someone’s home during the relevant period should be investigated.

What About Squatters and Property Guardians?

These situations require particular care.

Illegal occupation by squatters

HMRC guidance indicates that illegal occupation by squatters is disregarded for the relevant residential-use test.

This is an important distinction from genuine residential occupation.

Property guardians

Property guardians are more complicated.

A building awaiting redevelopment may be occupied by individuals under licence agreements intended to provide security.

However, where those individuals genuinely live in the property, there is a risk that their occupation amounts to residential use.

The terms of the arrangement, actual occupation and nature of the accommodation must be considered.

HMRC also has specific guidance on disregarding certain guardian occupation for housing association conversion provisions.

That treatment should not automatically be assumed to apply to the separate 10-year test for a developer’s first major-interest grant.

Where property guardians have occupied a building, the VAT position should be checked before relying on the 10-year rule.

How Do You Prove the Building Has Not Been Used Residentially?

HMRC may require the developer to demonstrate that the relevant conditions are satisfied.

This can be difficult where the building’s history extends back more than 10 years and the current developer did not own it during that period.

PROVING 10 YEARS OF NON-RESIDENTIAL USE
WHAT EVIDENCE WILL HMRC ACCEPT?

Useful evidence includes:

Evidence	What it may establish
Business rates records	Commercial assessment and occupation
Council tax records	Historic residential assessment
Electoral register	Evidence of residential occupation
Historic leases	Nature and duration of occupation
Planning records	Approved uses and alterations
Building control records	Historic physical conversion
Utility records	Patterns of use and occupation
Survey reports	Historic configuration
Photographs and floor plans	Whether living accommodation existed
Previous owners’ statements	Background evidence requiring corroboration

HMRC also refers to information from local authority Empty Property Officers and other reliable sources.

No single document will necessarily be conclusive.

For example, business rates records may support commercial occupation but do not automatically prove that no part of the building was used residentially.

Similarly, the absence of an electoral registration does not establish that nobody lived there.

The strongest approach is to assemble several independent sources of evidence.

A developer should establish the building’s history before exchange of contracts, rather than trying to reconstruct it after HMRC raises questions.

2-YEAR RULE vs 10-YEAR RULE
5% VAT ON QUALIFYING RENOVATION WORKS vs POTENTIAL 0% VAT ON THE FIRST QUALIFYING GRANT

The 10-Year Rule Is Not the Same as the Two-Year Empty-Property Rule

There are several VAT reliefs affecting residential property development.

They should not be confused.

VAT provision	Relevant period	Main purpose
10-year rule	Generally 10 years before the first qualifying grant	Establishes non-residential status for certain zero-rated conversions
Two-year empty-property rule	Generally two years before qualifying renovation work starts	May allow 5% VAT on eligible renovation and alteration services
Housing association conversion provisions	Separate 10-year test generally linked to commencement of works	May allow zero-rating of qualifying conversion services

The two-year rule concerns qualifying renovation and alteration works to dwellings that have not been lived in for the required period.

It does not turn a residential property into a non-residential building for the purposes of the 10-year rule.

Example 6 – House Empty for Three Years

Suppose a house has been vacant for three years.

A developer purchases it and undertakes substantial renovation works.

Qualifying building services may be eligible for the 5% reduced rate under the empty-property rules.

However, the house has been used as a dwelling within the previous 10 years.

Its first sale will not qualify for zero-rating merely because the building has been empty for three years.

The sale would normally be exempt unless another specific zero-rating provision applies.

The 5% rate on building works and the 0% rate on the first sale are separate questions.

Why Are the Rules Different for Housing Associations?

There are special VAT provisions for certain conversions carried out for relevant housing associations.

Under Schedule 8, Group 5, Note (7A), the relevant 10-year test for qualifying conversion services is linked to the commencement of the conversion works.

The test also contains specific conditions concerning the building’s design, adaptation and occupation.

This differs from the general rule for a developer’s first qualifying sale or long lease, where the 10-year period is measured by reference to the grant.

For certain DIY conversion refund claims, the relevant historic-use period is also measured by reference to the commencement of the works.

The important point is that the same expression, non-residential conversion, can appear in different VAT provisions with different statutory tests.

Developers, housing associations and contractors should identify the specific relief being claimed before determining the relevant dates.

Does the 10-Year Rule Mean the Building Work Is Zero-Rated?

No.

The zero-rating of the eventual first qualifying grant is separate from the VAT liability of the construction services.

For an ordinary commercial developer converting a non-residential building into dwellings, qualifying conversion services may be eligible for the 5% reduced rate.

Other costs, including many professional services, may be subject to 20% VAT.

Special zero-rating provisions can apply to qualifying services supplied to relevant housing associations, subject to their own conditions.

Where a building is intended for a relevant residential purpose, the certificate requirements and other statutory conditions must also be considered.

In particular, qualifying zero-rated services supplied directly to an eligible customer may require the prescribed certificate. Subcontractors cannot simply rely on a certificate issued to the main contractor.

Example 7 – Different VAT Rates on One Project

A developer purchases a former house that has been used as offices for 15 years.

The company converts it into flats.

Depending on the detailed conditions:

Qualifying conversion services may be charged at 5% VAT.
Architects, surveyors and other professional advisers may charge 20% VAT.
The developer’s first qualifying grants of major interests in the completed flats may be zero-rated.

The developer may be entitled to recover the input VAT incurred on costs attributable to its taxable zero-rated supplies.

However, input VAT recovery depends on the normal rules and the intended and actual use of the property.

See What Are the Practical Issues of Reduced VAT on Conversions?.

What If the Developer Lets the Flats Before Selling?

This is a common commercial scenario.

A developer completes a conversion intending to sell the flats.

However, market conditions are poor.

Instead of selling immediately, the developer grants short residential tenancies.

The rental income will normally be exempt from VAT.

If the developer subsequently makes a qualifying first grant of a major interest, that grant may still be zero-rated.

However, the temporary exempt lettings can affect input VAT recovery.

The developer may need to apportion input VAT between the exempt rental activity and the intended zero-rated disposal.

This principle was considered in Customs and Excise Commissioners v Briararch Ltd [1992].

Where the developer’s intention changes from selling to retaining the flats as long-term investments, further VAT adjustments may be required.

What about the Capital Goods Scheme?

The Capital Goods Scheme may also need to be considered for qualifying property expenditure.

It can require adjustments to input VAT recovery where the use of a property changes during the applicable adjustment period.

The detailed treatment depends on the expenditure, the supplies made and the structure of the transactions.

Developers should therefore retain evidence of their original intention to sell and review the VAT position if the flats are subsequently let.

A zero-rated eventual sale does not automatically guarantee full recovery of every VAT cost incurred during the development.

What Is Person-Converting Status?

Satisfying the 10-year rule is not enough by itself.

The first qualifying sale or long lease must also be made by a person who satisfies the statutory person-converting requirements.

Broadly, this can include a developer that owns the building and carries out or arranges the conversion works.

The legislation also recognises persons providing qualifying conversion services.

More than one person may potentially have person-converting status in relation to a development.

However, a later purchaser does not automatically obtain that status simply by acquiring the completed building.

Example 8 – Development Company and Investment Company

Development Ltd purchases a former residential building that has been used commercially for more than 10 years.

It converts the property into flats.

The completed property is then transferred to Investment Ltd.

Investment Ltd subsequently sells the flats.

Even if the building satisfies the 10-year rule, Investment Ltd must establish its own entitlement to zero-rating.

A company that merely purchases a completed conversion and resells it will not normally qualify as the person converting.

There are specific rules concerning certain transfers of a going concern under which the purchaser may be treated as having the relevant status, subject to the statutory conditions.

VAT grouping can also require separate analysis.

The company that carries out the conversion and the company that makes the first qualifying grant should be considered together before the development structure is finalised.

For a fuller explanation, see our article First Grant of a Major Interest – When Can a Residential Conversion Be Zero-Rated?

Can Garages and Outbuildings Qualify?

Garages and outbuildings require careful analysis.

A garage occupied together with a dwelling is subject to specific statutory restrictions.

The treatment may also depend on whether the structure has genuinely been used as a domestic garage or has had a different use for a substantial period.

Similarly, an agricultural barn may qualify as a non-residential building, but a barn used as a domestic garage can raise different issues.

Where garages are converted as part of a wider dwelling project and are intended to be occupied with the resulting dwelling, the VAT treatment may differ from a standalone garage conversion.

The description on the title documents is not necessarily decisive.

The actual historic use, physical configuration and nature of the conversion should be established.

Does the 10-Year Rule Override the Other Zero-Rating Conditions?

No.

The 10-year rule establishes only one element of the qualifying non-residential conversion analysis.

The developer must still satisfy the remaining statutory requirements.

These include:

A qualifying non-residential conversion.
A building designed as a dwelling or intended for a qualifying relevant residential purpose.
The requirement that the building is not converted into a disqualifying holiday home.
The necessary person-converting status.
A first qualifying grant of a major interest.
A valid certificate where required.

The detailed dwelling conditions can also be affected by planning restrictions.

For example, a property subject to restrictions preventing separate use or disposal may fail the relevant dwelling requirements.

The 10-year rule does not override those conditions.

Ten Common Mistakes With the 10-Year VAT Rule

Assuming the building must be completely empty for 10 years.
Measuring the 10-year period from the start of building work rather than the qualifying grant.
Assuming commercial planning permission proves non-residential use.
Ignoring occasional occupation as a second home.
Overlooking bedsits or living accommodation above shops and pubs.
Assuming residential use of one part of a building does not affect the whole-building test.
Confusing the 10-year rule with the two-year empty-property rule.
Assuming a later purchaser automatically acquires person-converting status.
Assuming temporary residential lettings have no effect on input VAT recovery.
Failing to establish the building’s historic use before purchasing the property.

Practical Checklist Before Purchasing an Old Residential Building

Before exchanging contracts, establish:

When was the building constructed?
Was it originally designed or adapted for residential use?
When was it last actually used as a dwelling?
Has any part been used for a relevant residential purpose?
Has there been occasional residential occupation?
Have property guardians or caretakers lived there?
Has the building contained bedsits or other basic living accommodation?
Is the proposed conversion of the whole building or only part?
Will additional dwellings be created?
Can the historic use be supported by independent evidence?
When will the first qualifying sale or long lease take place?
Does the proposed conversion create qualifying dwellings?
Which company will undertake the conversion?
Which company will make the first grants?
Will any flats be retained for exempt letting?
Have the input VAT and Capital Goods Scheme implications been considered?

These questions should be addressed before acquisition.

A historic residential-use problem may be impossible to resolve after the conversion has been completed.

Frequently Asked Questions

Can a former house converted into offices qualify for zero-rating when converted back into flats?

Yes, potentially. If the building satisfies the 10-year conditions and the other statutory requirements, the first qualifying grants of major interests may be zero-rated.

Does the building have to be empty for 10 years?

No. Continuous commercial occupation does not automatically prevent relief. The relevant issue is whether the building has been used as a dwelling or for a relevant residential purpose.

Can conversion work begin before the 10-year period has elapsed?

Yes, potentially. For the first qualifying major-interest grant, the relevant period is generally measured by reference to the date of the grant rather than the start of conversion works.

Does occasional residential occupation count?

It can. For example, occasional use as a second home may constitute residential use and affect the 10-year test.

Do squatters reset the 10-year period?

HMRC guidance indicates that illegal occupation by squatters is disregarded for the relevant test.

What about property guardians?

The position depends on the statutory provision and the facts. Genuine residential occupation by guardians may be problematic, and the specific housing association rules should not automatically be applied to developer sales.

Can a pub with a flat upstairs qualify?

Potentially, but the mixed-use conversion provisions must be examined. The creation of additional dwellings and the parts of the building being converted are particularly important.

Is the 10-year rule the same as the two-year empty-property rule?

No. The two-year rule concerns reduced-rated renovation work. It does not establish non-residential status under the 10-year rule.

Does satisfying the 10-year rule guarantee recovery of all development VAT?

No. Recovery depends on the intended and actual taxable or exempt supplies and the normal VAT rules.

Can a developer sell several converted flats at 0% VAT?

Potentially. Each first qualifying grant of a major interest may be zero-rated, provided all the relevant statutory conditions are satisfied.

Final Thoughts

The 10-year VAT rule is a valuable provision for property developers.

It can allow a building originally designed or used as residential accommodation to qualify as non-residential for the purposes of a subsequent conversion.

However, the rule is about historic residential use and the timing of the qualifying grant — not simply whether the building has been empty.

The most important considerations are:

Establishing the building’s actual history.
Identifying the correct 10-year period.
Obtaining reliable evidence of non-residential use.
Checking whether any part of the building has been used residentially.
Applying the mixed-use and additional-dwelling provisions where relevant.
Ensuring the developer has person-converting status.
Considering the VAT recovery implications of any exempt lettings.

The potential benefit is significant because a qualifying zero-rated sale may support recovery of input VAT that would otherwise be restricted on an exempt disposal.

But the VAT position should be reviewed before acquisition and before the development structure is finalised.

Bicknell Business Advisers Limited specialises in accounting and tax advice for property investors, developers and construction businesses.

If you are considering converting an old residential or commercial building into flats, obtaining advice on the VAT treatment at an early stage can help avoid expensive mistakes.

Start with our main commercial-to-residential VAT guide:

Commercial to Residential Conversion VAT – 5%, 0% or 20%?

Then see:

First Grant of a Major Interest – When Can a Residential Conversion Be Zero-Rated?

Add the link to the recently published article.

VAT1614D: Can You Disapply an Option to Tax When Converting Commercial Property to Residential?

Add the link to the published VAT1614D article.

Existing Articles

HMRC Sources and Technical References

Legislation: Value Added Tax Act 1994, Schedule 8, Group 5, particularly Item 1(b) and Notes (7), (7A) and (9).

This article provides general information on UK VAT rules as at October 2026. The VAT treatment of an individual property development depends on its specific circumstances. Professional advice should be obtained before transactions are completed.

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, landlord tax planning, SDLT, Capital Gains Tax and property company structures throughout the UK.

VAT1614D: Can You Disapply an Option to Tax When Converting Commercial Property to Residential?

VAT1614D: Commercial to Residential Property VAT Explained

By Steve Bicknell FCMA, CGMA

You have found an office building for:

£1,000,000

It looks ideal for conversion into residential flats.

Then your solicitor tells you:

“The seller has opted to tax, so there will be another £200,000 VAT on the purchase.”

Do you actually have to pay it?

POTENTIALLY NOT.

If the conditions are satisfied, VAT1614D can disapply the seller’s option to tax where the building is being acquired for conversion into dwellings or qualifying residential use.

HMRC specifically provides VAT1614D for this purpose.

But VAT1614D isn’t the only route a property developer should consider.

Depending on the circumstances, the developer might instead:

buy an existing property rental business as a Transfer of a Going Concern (TOGC);
continue collecting commercial rents while seeking residential planning permission;
buy the company that already owns the property;
secure the property using an option to purchase while seeking planning;
enter into a conditional purchase contract;
or buy the building directly for immediate residential conversion.

Those routes can have very different consequences for:

VAT + SDLT + STAMP DUTY + CORPORATION TAX + CAPITAL ALLOWANCES

So before agreeing how to buy the building, the better question is:

WHAT EXACTLY ARE WE BUYING – AND WHAT WILL WE DO WITH IT FIRST?

Commercial property acquisition options including VAT1614D TOGC share purchase and purchase option

Quick Answer – Four Possible Acquisition Routes

A developer looking at the same commercial building could potentially consider:

Acquisition route	Key tax issue
Buy vacant building for residential conversion	VAT1614D
Buy existing property rental business and continue it	TOGC
Buy the company that owns the property	Share purchase / Stamp Duty
Secure property while seeking planning	Purchase option / conditional contract

These aren’t simply four interchangeable ways of avoiding tax.

Each has different legal and tax consequences.

The facts determine which treatment applies.

Route 1 – VAT1614D

Commercial land and buildings are commonly exempt from VAT unless an exception applies or the owner has exercised an:

OPTION TO TAX

An option to tax will normally make supplies that would otherwise be exempt taxable.

But there are circumstances where the option is disapplied.

One of the most important for property developers is where a commercial building is going to be:

CONVERTED INTO DWELLINGS

or used solely for a qualifying relevant residential purpose.

HMRC confirms that VAT1614D is the prescribed certificate for buildings being converted into dwellings.

HMRC – VAT1614D

HMRC – VAT Notice 742A: Opting to Tax Land and Buildings

£1 Million Office – VAT1614D Example

Suppose Conversion Developments Ltd agrees to purchase a vacant office.

Purchase price:

£1,000,000

The seller has opted to tax.

Without disapplication:

	Amount
Property	£1,000,000
VAT at 20%	£200,000
Total	£1,200,000

Conversion Developments Ltd intends from the outset to convert the offices into:

10 RESIDENTIAL FLATS

If the conditions are satisfied and VAT1614D is provided correctly and at the right time, the seller’s option to tax can be disapplied.

The underlying property supply would then normally be:

VAT EXEMPT

rather than standard-rated because of the seller’s option.

That could remove the need to fund:

£200,000 VAT

at acquisition.

VAT1614D Can Affect SDLT Too

A developer might say:

“We’re VAT registered and we’re going to sell the flats, so can’t we just recover the £200,000 VAT?”

Potentially, depending on the subsequent taxable use and normal input-tax rules.

But that overlooks:

CASH FLOW

and:

SDLT

HMRC confirms that VAT actually payable on a land transaction is included in the chargeable consideration for SDLT, even where that VAT can subsequently be recovered as input tax.

So:

Property: £1,000,000

VAT: £200,000

could potentially mean SDLT is calculated on:

£1,200,000

rather than £1 million.

That makes VAT1614D potentially much more than a cash-flow issue.

HMRC – SDLT and VAT

VAT1614D example disapplying option to tax on commercial property conversion

VAT1614D Timing – Don’t Leave It Until Completion

This is one of the most important practical points.

HMRC says the VAT1614D certificate should be given:

BEFORE THE PRICE IS LEGALLY FIXED

and gives examples including:

exchange of contracts;
letters or missives;
and signing heads of agreement.

HMRC also notes that heads of agreement do not necessarily legally fix the price in every case.

If the certificate arrives after the price has been legally fixed, the seller is not obliged to accept it, although there are circumstances where the seller may choose to do so for later supplies.

So the practical message is:

DON’T WAIT UNTIL EXCHANGE TO START THINKING ABOUT VAT1614D.

Consider it when the transaction is being negotiated.

The Residential Intention Must Be Genuine

VAT1614D isn’t simply a mechanism for removing VAT from a commercial property purchase.

The purchaser must have the relevant qualifying intention.

HMRC says a purchaser can certify where it intends to:

use the building as a dwelling or for a qualifying relevant residential purpose; or
convert the building with a view to that qualifying residential use.

Importantly, HMRC says the certificate cannot generally be issued where the purchaser intends to put the building to a non-qualifying use for a period first, although minor or incidental use can be disregarded.

That becomes particularly important when comparing:

VAT1614D

with:

TOGC

Route 2 – Transfer of a Going Concern

Suppose the building isn’t vacant.

Instead it is an existing:

COMMERCIAL PROPERTY INVESTMENT

with tenants paying rent.

The developer intends to buy the building, continue collecting rent and seek planning permission for residential conversion.

That raises a different question:

COULD THE PURCHASE BE A TOGC?

A qualifying Transfer of a Going Concern is not treated as a supply for VAT purposes.

This is fundamentally different from VAT1614D.

VAT1614D potentially makes the underlying property supply exempt by disapplying an option to tax.

A TOGC is:

OUTSIDE THE SCOPE OF VAT

where its conditions are satisfied.

HMRC – Transfer a Business as a Going Concern, VAT Notice 700/9

A Tenanted Property Can Be a TOGC

HMRC specifically confirms that where someone owns a freehold property, lets it to a tenant and sells the freehold with the benefit of that lease:

A PROPERTY RENTAL BUSINESS CAN BE TRANSFERRED

HMRC also confirms that a property can potentially qualify even where it is only:

PARTLY TENANTED

provided there is genuine economic activity and the letting isn’t negligible.

Developer Example – Continue Renting While Seeking Planning

Suppose Conversion Developments Ltd finds a commercially let office building.

Purchase price:

£2,000,000

The building is occupied by several commercial tenants.

The developer believes it could eventually be converted into:

20 FLATS

but planning permission isn’t certain.

The plan is therefore:

acquire the existing property investment;
take over the tenants;
collect the commercial rents;
manage the property;
submit a residential planning application;
continue operating the rental business while planning is considered;
obtain vacant possession later;
and then carry out the residential conversion.

Could the original purchase be a TOGC?

POTENTIALLY.

HMRC requires the buyer to intend to carry on the same kind of business.

There must be genuine continuing business activity rather than merely acquiring assets for immediate disposal.

But importantly:

THERE IS NO PRESCRIBED MINIMUM PERIOD

for which the business has to continue after transfer.

HMRC says the continuation must be real and that there should be an identifiable business before the transfer that remains recognisable afterwards.

That makes TOGC particularly relevant where a developer genuinely continues a property rental business while pursuing planning.

Simply Collecting Rent Briefly Doesn’t Automatically Create a TOGC

The substance of the transaction matters.

A developer cannot simply say:

“There’s a tenant, so let’s call it a TOGC.”

You need to examine:

what business the seller is actually carrying on;
what leases exist;
what is being transferred;
whether the buyer genuinely continues that activity;
and what the buyer intends to do immediately after completion.

The distinction is between:

BUYING A BUSINESS

and:

BUYING AN ASSET

Seller Has Opted to Tax – TOGC Becomes More Complicated

Where the seller has opted the property to tax, additional TOGC conditions can apply.

The purchaser may need to:

make its own option to tax;
notify HMRC appropriately;
and give the seller the necessary confirmation.

HMRC’s own TOGC guidance illustrates an important point.

If:

Seller has opted to tax

and:

Buyer has opted to tax

but:

Buyer’s option is disapplied

the relevant property TOGC conditions are not met.

This highlights why:

TOGC AND VAT1614D ARE NOT INTERCHANGEABLE.

VAT1614D or TOGC?

A useful starting point is:

Vacant commercial building bought for immediate residential conversion

Think:

VAT1614D

Existing rental business genuinely continued after acquisition

Think:

TOGC

The actual facts determine the answer.

Route 3 – Buy the Company That Owns the Property

There is another possibility where the commercial property is already owned by:

A LIMITED COMPANY

Rather than buying the property from that company, the developer might buy:

THE SHARES IN THE COMPANY

This creates a fundamentally different transaction.

The property doesn’t change hands.

The company owned the property before the transaction.

The same company owns it afterwards.

What changes is:

WHO OWNS THE COMPANY.

Example – Bicknell Property Investments Ltd

Suppose the fictional company:

BICKNELL PROPERTY INVESTMENTS LTD

owns a commercial property.

Its accounts show:

Investment property: £600,000

Other net assets: £25,000

Net assets: £625,000

However, the property is now considered to be worth substantially more.

The parties agree a price of:

£750,000

for 100% of the shares.

Development Holdings Ltd buys the shares.

Compare that with buying the property itself.

Buying property versus buying shares in a property company tax comparison

Buy the Property

Bicknell Property Investments Ltd sells the building to Development Holdings Ltd.

That is:

A LAND TRANSACTION

So you need to consider:

SDLT;
VAT;
option to tax;
VAT1614D;
TOGC;
Section 198;
and capital allowances.

Buy the Company

Development Holdings Ltd buys the shares in Bicknell Property Investments Ltd.

The property remains exactly where it was.

Therefore Development Holdings Ltd has acquired:

not land.

That changes the transaction taxes significantly.

The purchase of shares in a UK company will normally be subject to:

0.5% STAMP DUTY

rather than SDLT on the underlying property.

HMRC states that when you buy existing shares you will usually pay tax or duty at 0.5%.

Where Stamp Duty applies to a stock transfer form, it is generally calculated on the consideration paid for the shares.

HMRC – Tax When You Buy Shares

So in our fictional example:

Share purchase price: £750,000

Stamp Duty at 0.5%: £3,750

That could be very different from the SDLT cost of acquiring a £750,000 property directly.

But:

This is also important.

HMRC specifically considers companies holding property within corporate structures.

The UK does not treat a transfer of the shares in a property-owning company as though the underlying property itself had been sold for VAT purposes.

The supply of the shares is therefore generally:

EXEMPT FROM VAT

HMRC – Transfers of Shares in Property-Owning Companies

So buying the shares doesn’t normally result in the seller adding 20% VAT to the underlying property value merely because that property has been opted to tax.

The company continues to own the property.

Its existing VAT history also remains with it.

But You Are Buying the Company’s History

This is the major downside.

Buy a property and you acquire:

THE PROPERTY

Buy a company and you acquire:

THE COMPANY

including its history.

That could include exposure to:

Corporation Tax;
VAT;
PAYE;
historic SDLT;
contractual liabilities;
tenant disputes;
planning matters;
environmental issues;
mortgages;
guarantees;
director balances;
litigation;
incorrect historic accounts;
previous capital allowance claims;
and other liabilities.

This is why buying a property company usually requires extensive:

LEGAL + TAX + FINANCIAL DUE DILIGENCE

The share purchase agreement will also commonly deal with:

warranties;
indemnities;
disclosure;
and a tax covenant.

Suppose the property is worth:

£1,500,000

but the company also has:

	Amount
Property	£1,500,000
Cash	£50,000
Debtors	£20,000
Mortgage	(£700,000)
Other creditors	(£30,000)
Potential tax liabilities	?

The shares clearly aren’t automatically worth £1.5 million.

The share price should reflect:

ASSETS – LIABILITIES – TAX EXPOSURE – COMMERCIAL RISK

Watch the Latent Property Gain

This can be particularly important with older property companies.

Suppose Bicknell Property Investments Ltd acquired its building many years ago for:

£300,000

and it is now worth:

£1,500,000

Buying the shares doesn’t give the company a new £1.5 million tax base cost for the building.

The company still owns the same asset with its existing tax history.

Consequently there may be a substantial:

LATENT CHARGEABLE GAIN

within the company.

If the company later sells the building, Corporation Tax may arise on the chargeable gain calculated using its appropriate historic tax base.

A sophisticated purchaser will therefore normally take the latent tax exposure into account when negotiating the:

Could You Buy the Company and Then Move the Property?

Potentially.

Suppose Development Holdings Ltd buys 100% of:

BICKNELL PROPERTY INVESTMENTS LTD

It may subsequently decide that the property would be better held elsewhere within the new group.

For example:

Development Holdings Ltd

↓

Bicknell Property Investments Ltd

↓

Commercial Property

The group may want to move the property to Development Holdings Ltd or another group company.

This brings another set of tax rules into play.

SDLT Group Relief

HMRC’s group-relief provisions can allow land and buildings to move between qualifying companies within the same group without an immediate SDLT charge.

Broadly, the relevant companies need to meet the statutory group conditions, including the applicable:

75% GROUP TEST

The purchaser claims the relief on the land transaction.

HMRC – SDLT Group Relief

But group relief shouldn’t simply be assumed.

There are:

qualifying conditions;
restrictions;
anti-avoidance provisions;
and withdrawal provisions.

The commercial reason for the intra-group transfer should therefore be documented.

Corporation Tax – No Gain/No Loss

Qualifying assets can generally move between companies in the same capital gains group on a:

NO GAIN / NO LOSS BASIS

This prevents an immediate chargeable gain simply because an appreciated property moves between qualifying group companies.

HMRC explains that the transferee effectively takes over the transferor’s capital gains cost.

HMRC – No Gain/No Loss Transfers Within Groups

So if:

Historic tax cost: £300,000

Current property value: £1,500,000

an intra-group transfer doesn’t normally turn the tax base cost into £1.5 million.

The economic gain has not disappeared.

Revaluation Doesn’t Create a New Tax Base Cost

This is an important distinction.

After buying the company, the group may obtain a valuation showing:

£1,500,000

and the accounting treatment may reflect the property’s fair value.

But:

ACCOUNTING VALUE ≠ TAX BASE COST

A revaluation for accounting purposes doesn’t by itself reset the tax base cost for a future chargeable gain.

Watch the Two Different Group Time Limits

This is an area where different rules can easily become confused.

SDLT Group Relief

HMRC’s principal group-relief withdrawal rule can apply where the purchaser leaves the relevant group within:

THREE YEARS

of the intra-group land transaction, or as a result of arrangements made during that period.

Corporation Tax Degrouping

The capital gains degrouping rules can potentially apply where a company leaves a group owning an asset acquired from another group company within the previous:

SIX YEARS

These are:

TWO DIFFERENT TAX RULES

and shouldn’t be confused.

HMRC – SDLT Group Relief

HMRC – Corporation Tax Degrouping

Route 4 – Take an Option While Seeking Planning

A developer may not want to buy the building at all until planning prospects are clearer.

Suppose the owner wants:

£1,500,000

for an office building.

The developer instead pays:

£50,000

for an option giving it the right to acquire the building for £1.5 million if satisfactory residential planning permission is obtained within 18 months.

The developer has secured control of the opportunity without immediately committing £1.5 million.

But:

THE OPTION ITSELF CAN HAVE VAT CONSEQUENCES.

An Option to Purchase Is an Interest in Land for VAT

HMRC confirms that someone granted an option to purchase property acquires an:

INTEREST IN LAND

for VAT purposes.

The VAT liability of granting the option generally follows the VAT treatment the underlying property transaction would have:

AT THE TIME THE OPTION IS GRANTED

HMRC – VAT Treatment of Property Options

So if the underlying property supply would be exempt at that point, the option will generally be exempt.

If the underlying property transaction would be taxable at that point, the option will generally be taxable.

£50,000 Option Example

Suppose:

Option premium: £50,000

Future purchase price: £1,500,000

Option period: 18 months

Property: Commercial offices

Developer’s intention: Obtain planning and convert to flats

If the option grant is taxable at that time:

Option premium: £50,000

VAT: £10,000

But importantly:

THE VAT TREATMENT OF THE OPTION DOES NOT NECESSARILY DETERMINE THE VAT TREATMENT OF THE EVENTUAL PROPERTY PURCHASE.

The eventual acquisition must be considered when it takes place.

That might bring VAT1614D back into consideration.

What About a Conditional Contract?

Another possibility is:

BUY SUBJECT TO PLANNING

Rather than taking an option, the developer enters into a contract where completion is conditional on specified events.

These might include:

satisfactory planning permission;
vacant possession;
funding;
environmental approval;
or another development condition.

An option and a conditional purchase contract aren’t legally identical.

The tax consequences can therefore differ.

This reinforces the main message:

DON’T WAIT UNTIL COMPLETION TO THINK ABOUT VAT AND SDLT.

What About the Seller’s Capital Goods Scheme?

VAT1614D can be very attractive to the buyer.

But the seller may have a problem.

Suppose the seller:

acquired the property with VAT;
opted to tax;
recovered input VAT;
incurred substantial refurbishment VAT;
and expected to make a taxable sale.

Disapplying the option may turn the disposal into an exempt supply.

That could affect the seller’s input VAT recovery and:

CAPITAL GOODS SCHEME

position.

There was an important change in 2026.

From 29 July 2026, the Capital Goods Scheme threshold for land, buildings and civil engineering works increased from:

£250,000 TO £600,000

excluding VAT.

Existing capital items already within the scheme remain within it for their normal adjustment periods.

HMRC – Changes to the VAT Capital Goods Scheme

That may affect the seller’s willingness to accept VAT1614D and therefore the commercial negotiations.

Don’t Forget Capital Allowances and Section 198

When acquiring an existing commercial building, VAT and SDLT aren’t the only tax issues.

There may be valuable capital allowances within:

electrical systems;
heating;
hot-water systems;
air-conditioning;
ventilation;
lifts;
and other qualifying fixtures and integral features.

Before acquisition, establish:

what allowances have previously been claimed;
whether expenditure has been pooled;
what fixtures are included;
and whether a Section 198 election is required.

This can be particularly important where the building is about to be converted to residential use.

What Happens After Acquisition?

The acquisition is only stage one.

A commercial-to-residential development can potentially encounter several VAT treatments.

Buy

Potentially:

VAT1614D → exempt

or:

TOGC → outside scope

or:

share purchase → VAT-exempt shares

or:

standard-rated property acquisition

Convert

Qualifying residential conversion works may potentially be:

5% VAT

Sell

The first qualifying grant of a major interest following a non-residential conversion may potentially be:

ZERO-RATED

HMRC sets out the conditions in VAT Notice 708.

HMRC – Buildings and Construction, VAT Notice 708

Retain and Rent

Ordinary residential rents are generally:

VAT EXEMPT

which can restrict input VAT recovery.

This is why the:

EXIT STRATEGY

needs considering before the acquisition.

Four Routes to the Same Development Opportunity

Suppose a developer identifies a £1.5 million office building suitable for conversion into flats.

There could potentially be four routes.

Route 1 – Buy the Building

Vacant and ready for conversion.

Consider:

VAT1614D

Route 2 – Buy the Existing Property Business

Tenants remain and the developer genuinely continues collecting rents while seeking planning.

Consider:

TOGC

Route 3 – Buy Bicknell Property Investments Ltd

The company already owns the property.

Consider:

with:

0.5% Stamp Duty;
generally VAT-exempt shares;
no direct SDLT acquisition of the underlying land at that stage;
but historic liabilities and latent tax exposures.

Route 4 – Secure the Site Now and Buy Later

Planning uncertain.

Consider:

OPTION TO PURCHASE

or:

CONDITIONAL CONTRACT

and review the VAT and SDLT consequences at each stage.

Developer Acquisition Decision Tree

WHO OWNS THE PROPERTY?

Individual or another business selling the property?

↓

ARE YOU BUYING NOW?

YES

Vacant for immediate residential conversion?

→ VAT1614D?

Existing rental business genuinely being continued?

→ TOGC?

NO

Seeking planning first?

→ OPTION?

→ CONDITIONAL CONTRACT?

Property already sits inside a limited company?

↓

Could you buy:

THE COMPANY RATHER THAN THE PROPERTY?

↓

Consider:

0.5% Stamp Duty

No direct SDLT land acquisition at that stage

VAT-exempt share transaction

BUT:

Historic liabilities

Latent Corporation Tax

Due diligence

Financing

Tax covenant and warranties

15 Common Mistakes

1. Assuming an opted building automatically means 20% VAT

VAT1614D may disapply the option.

2. Waiting until completion to consider VAT1614D

HMRC’s timing requirement can be much earlier.

3. Assuming exchange is always the relevant deadline

The test is when the price becomes legally fixed.

4. Using VAT1614D despite intending to continue a significant commercial use first

The intended-use conditions need to be checked carefully.

5. Assuming every tenanted building is a TOGC

A genuine business must be transferred and continued.

6. Assuming future residential conversion automatically prevents TOGC

It doesn’t necessarily do so if a genuine property business is actually continued initially.

7. Inventing a short rental period simply to obtain TOGC treatment

The continuing business activity must be real.

8. Treating VAT1614D and TOGC as interchangeable

They are fundamentally different VAT treatments.

9. Forgetting the buyer’s option-to-tax requirements for a property TOGC

These can be critical.

10. Assuming buying a property company means buying only the property

You acquire the company’s history and liabilities.

11. Ignoring latent Corporation Tax when valuing shares

The company’s property retains its tax history.

12. Assuming a property revaluation creates a new tax base cost

It doesn’t automatically do so.

13. Assuming an option premium has no VAT consequences

An option to purchase is itself an interest in land for VAT.

14. Ignoring SDLT on VAT

VAT actually payable can increase SDLT chargeable consideration.

15. Forgetting capital allowances

Check fixtures and Section 198 before the commercial building becomes residential.

Pre-Acquisition Checklist

Before committing to a commercial-to-residential project, ask:

Who owns the building?

Could a share purchase be considered?

Has the seller opted to tax?

Obtain evidence.

What are we buying?

Property, business, shares or merely an option?

What happens immediately after acquisition?

Convert, continue renting or wait for planning?

Could VAT1614D apply?

Check the residential intention and timing.

Could TOGC apply?

Check whether a genuine business is being transferred and continued.

Is the property company itself for sale?

Compare asset purchase and share purchase.

Are we seeking planning before committing?

Consider an option or conditional contract.

What is the SDLT or Stamp Duty position?

Don’t assume they produce the same result.

What historic tax liabilities exist?

Especially with a share purchase.

Is there a latent property gain?

Consider this when valuing the company.

Are there capital allowances?

Check pooling and Section 198.

Is the property within the Capital Goods Scheme?

Review both buyer and seller consequences.

What is the exit?

Sell, grant a long lease or retain and rent?

Frequently Asked Questions

What is VAT1614D?

VAT1614D is HMRC’s prescribed certificate used in qualifying circumstances to disapply an option to tax where a building is intended for conversion into dwellings or qualifying residential use.

When should VAT1614D be given?

HMRC says it should be given before the price is legally fixed. This can potentially be before exchange, depending on the transaction documentation.

Can VAT1614D be used for an office-to-flat conversion?

Potentially yes, provided the conditions are satisfied.

Can a tenanted commercial building qualify as a TOGC?

Potentially yes. HMRC specifically recognises transfers of let and partly let properties as capable of being property-rental-business TOGCs.

Can I continue collecting rent while seeking planning permission?

Potentially. HMRC does not prescribe a minimum continuation period, but the business activity must genuinely continue rather than being an artificial or instantaneous arrangement.

Can I buy the company instead of the property?

Potentially yes, where the property is held within a company and the shareholders are prepared to sell their shares.

Is SDLT payable when I buy a property company?

The acquisition of shares is not itself a direct acquisition of the underlying land for SDLT purposes. Existing UK company shares are generally instead within the Stamp Duty/SDRT regime, normally at 0.5%, subject to the particular circumstances.

Is VAT charged on shares in a property company?

HMRC’s position is that the supply of shares in a property-owning company is generally exempt from VAT.

Does buying the shares reset the property’s tax value?

No. The company continues to own the same property with its existing tax history.

Can I move the property after buying the company?

Potentially. SDLT group relief and Corporation Tax no gain/no loss provisions may be available where their respective group conditions are satisfied, but withdrawal and degrouping rules must be considered.

What is the SDLT group-relief withdrawal period?

The principal withdrawal rule can apply where the purchaser leaves the relevant group within three years or under arrangements made within that period.

What is the Corporation Tax degrouping period?

A degrouping charge can potentially arise where a company leaves a group owning an asset acquired from another group member within the previous six years.

Is an option to purchase property subject to VAT?

Potentially. HMRC treats the grant of a call option as a supply of an interest in land and its VAT treatment generally follows that of the underlying property at the time the option is granted.

Does VAT on the option determine VAT on the eventual property purchase?

Not necessarily. They are separate supplies and the eventual property transaction needs to be considered on the facts existing at that time.

The Most Important Question Isn’t “How Much VAT Is There?”

When a developer finds a commercial building suitable for residential conversion, the first instinct is often:

“How much is the property?”

But before signing anything, some equally important questions are:

WHO OWNS IT?

WHAT EXACTLY ARE WE BUYING?

WHAT WILL WE DO WITH IT IMMEDIATELY AFTER COMPLETION?

WHAT IS OUR EVENTUAL EXIT?

The same development opportunity could potentially involve:

VAT1614D

or:

TOGC

or:

BUYING THE PROPERTY COMPANY

or:

AN OPTION TO PURCHASE

And each route has different consequences for:

VAT + SDLT + STAMP DUTY + CORPORATION TAX + CAPITAL ALLOWANCES

This is why the acquisition tax review should happen:

BEFORE THE DEAL STRUCTURE IS AGREED

not after completion.

How Bicknell Business Advisers Can Help

At Bicknell Business Advisers, we work extensively with property investors and developers and can help with the tax and accounting implications of commercial-to-residential projects, including:

VAT1614D;
options to tax;
Transfers of Going Concerns;
property-company acquisitions;
asset purchase versus share purchase considerations;
purchase options and conditional acquisitions;
5% residential conversion VAT;
zero-rated first major interests;
VAT registration and recovery;
partial exemption;
Capital Goods Scheme issues;
capital allowances;
Section 198 elections;
group structures;
SDLT considerations;
CIS;
and Corporation Tax.

A £1 million building can potentially involve:

£200,000 VAT

before development has even started.

But VAT may only be one part of the acquisition decision.

The key is to establish the:

PROPERTY + OWNERSHIP + ACQUISITION STRUCTURE + INTENDED USE + EXIT

before committing to the transaction.

This article forms part of our Property Development VAT series.

Start with:

Commercial to Residential Conversion VAT – 5%, 0% or 20%?

Also see:

Zero Rating Commercial Conversions – First Grant of a Major Interest

Is There VAT on Part-Complete Conversions?

Practical Issues of Reduced VAT on Conversions

Permitted Development – VAT Zero Rating

When Do You Need a Certificate for 5% VAT on Building Work?

VAT Implications of Converting Commercial Buildings to Residential

How Do You Get Zero VAT Using the 10-Year Rule?

Next in This Series

First Grant of a Major Interest – When Can a Residential Conversion Be Zero-Rated?

That will examine the other end of the development journey: when the first qualifying sale or long lease following a non-residential conversion can potentially be:

ZERO-RATED RATHER THAN EXEMPT

About the Author

Family Investment Company vs Discretionary Trust – Which Is Better?

FIC vs discretionary trust, Family Investment Company or trust, FIC or trust, Family Investment Company trust comparison, discretionary trust vs company

FICs and Trusts Compared for Inheritance Tax, Control, Property Investment and Passing Wealth to Future Generations

By Steve Bicknell FCMA, CGMA

Family Investment Company vs Discretionary Trust is becoming an increasingly important comparison for families looking to pass wealth to children and grandchildren while retaining control.

Both structures can be used for long-term family wealth planning.

Both can separate control from the people who ultimately benefit from the wealth.

Both can potentially help move value or future growth away from an individual’s estate.

But they work in fundamentally different ways and have very different tax consequences.

And sometimes the answer isn’t:

FIC OR TRUST.

It is:

FIC + TRUST.

Quick Answer – FIC or Discretionary Trust?

A Family Investment Company is generally stronger for investing and compounding substantial family wealth while retaining control. A discretionary trust is generally stronger where flexibility, asset protection and future or unknown beneficiaries are the priority. For some families, a discretionary trust owning growth shares in a FIC can combine advantages of both.

The important distinction is that a:

FAMILY INVESTMENT COMPANY IS PRIMARILY AN INVESTMENT VEHICLE

whereas a:

DISCRETIONARY TRUST IS PRIMARILY AN OWNERSHIP AND SUCCESSION STRUCTURE.

That distinction drives much of the tax treatment.

	Family Investment Company	Discretionary Trust
Legal structure	Company	Trust
Who controls it?	Directors/shareholders	Trustees
Beneficiaries/shareholders have fixed rights?	Depends on share rights	Beneficiaries usually do not
Future generations	Good	Very flexible
Large sums can be invested	Yes	Yes, but IHT entry charges need considering
Immediate IHT charge on creation	Not necessarily	Can arise
10-year IHT charges	No company-level 10-year charge	Potentially yes
Tax on retained income	Corporation Tax	Trust Income Tax
Property investment	Often attractive	Possible
Founder can retain control	Potentially strong	Trustees control
Original capital accessible	Potentially via loan account	Generally much less flexible
Asset protection	Depends on shareholder	Potentially stronger
Future/unknown beneficiaries	More difficult	Excellent
Administration	Company compliance	Trust compliance
Best suited to	Investment and future growth	Flexibility and succession

Let’s look at why.

What Is a Family Investment Company?

A Family Investment Company, usually abbreviated to FIC, is normally a private limited company whose shareholders are members of the same family.

It might hold:

residential property;
commercial property;
shares;
investment funds;
cash;
loans;
or a combination of investments.

Different classes of shares can have different rights to:

votes;
dividends;
capital;
and future growth.

That can allow parents or grandparents to retain:

CONTROL

while children, grandchildren or trusts participate in:

FUTURE GROWTH.

HMRC itself investigated FICs through a specialist unit established in April 2019.

HMRC found that FICs were commonly used for intergenerational wealth planning, often using different share classes so older generations retained voting rights while younger generations had rights to income or capital. HMRC also found no evidence that people establishing FICs were more inclined towards avoidance or non-compliant behaviour. The specialist project was subsequently ended and FICs became part of HMRC’s normal compliance activity.

So a FIC isn’t a special HMRC tax scheme.

It is a company whose share rights, funding and transactions are designed around a family’s long-term objectives.

What Is a Discretionary Trust?

A discretionary trust works very differently.

Assets are legally held by:

TRUSTEES

for a class of:

BENEFICIARIES.

Those beneficiaries might include:

children;
grandchildren;
future grandchildren;
spouses;
other descendants;
or other people identified in the trust deed.

The critical feature is that an individual discretionary beneficiary does not normally have an absolute entitlement to a particular trust asset.

Instead, the trustees decide, subject to the trust deed and their legal duties:

which beneficiaries receive income;
which receive capital;
when distributions are made;
and how much they receive.

This creates considerable flexibility.

The Biggest Difference – Who Owns the Value?

This is perhaps the easiest way to understand the difference.

With a FIC

Value is represented by:

and potentially:

SHAREHOLDER LOANS.

The rights attached to each share class determine who has:

votes;
dividend rights;
capital rights;
and future growth.

If your adult daughter owns growth shares, she genuinely owns those shares.

With a discretionary trust

The:

TRUSTEES OWN THE ASSETS

and manage them for the beneficiaries.

A discretionary beneficiary does not ordinarily own a particular percentage of the trust fund.

That means:

FIC = DEFINED SHAREHOLDER RIGHTS

whereas:

TRUST = TRUSTEE DISCRETION.

£1 Million – FIC vs Discretionary Trust

Let’s use a completely fictional family.

David and Emma Taylor have accumulated:

£1,000,000

which they want to invest for the long-term benefit of their family.

They have two adult children:

Alex and Sophie

and expect grandchildren in future.

They are considering two options.

Option 1 – £1 Million Family Investment Company

David lends:

£1,000,000

to:

Taylor Family Investments Ltd.

Initially, the balance sheet might broadly look like this:

	£
Cash/investments	1,000,000
Loan owed to David	(1,000,000)
Initial net company value	approximately nil

The company then invests the money.

The family might establish:

Control shares

held by David and Emma

and:

Growth shares

held by Alex and Sophie.

If the investments eventually become worth:

£3,000,000

the original £1 million loan still belongs to David to the extent it hasn’t been:

repaid;
spent;
gifted;
or otherwise transferred.

But much of the:

£2 MILLION FUTURE GROWTH

could potentially accrue to the growth shares.

The important point is:

THE FIC HASN’T MAGICALLY REMOVED £1 MILLION FROM DAVID’S ESTATE.

Instead, it can potentially:

REDIRECT FUTURE GROWTH.

Option 2 – £1 Million Discretionary Trust

Suppose instead David transfers:

£1,000,000

directly into a discretionary trust.

This is fundamentally different.

David has transferred the assets to trustees.

But that immediately raises:

INHERITANCE TAX.

A transfer of assets into a relevant-property trust is normally an immediately chargeable transfer for IHT purposes.

That means a substantial lifetime transfer into a discretionary trust can create an immediate IHT charge.

And once the assets are within the relevant-property regime, there can potentially be further charges:

EVERY 10 YEARS

and:

WHEN ASSETS LEAVE THE TRUST.

This is one of the most important differences between a FIC and a discretionary trust.

The £325,000 Trust Issue

The standard IHT nil-rate band is currently:

£325,000.

There is no rule saying that a discretionary trust cannot hold more than £325,000.

It absolutely can.

The issue is the potential:

INHERITANCE TAX ENTRY CHARGE.

If an individual transfers assets into a discretionary relevant-property trust, the transfer is generally immediately chargeable.

Subject to available exemptions, reliefs, the settlor’s previous chargeable transfers and the available nil-rate band, amounts above the available threshold can create lifetime IHT.

The lifetime rate is generally 20% where the tax is borne by the person making the transfer.

So:

£325,000 IS NOT A MAXIMUM TRUST SIZE.

It is relevant because of the IHT calculation.

This is one reason a FIC can be more practical where a family has £1 million, £2 million or considerably more to invest.

But remember:

LENDING £1 MILLION TO A FIC DOES NOT REMOVE THE £1 MILLION FROM YOUR ESTATE.

The loan is still an asset.

FIC vs Trust – What Happens to £1 Million?

A useful way of thinking about it is:

FIC

£1m loan

↓

FIC invests £1m

↓

Founder still owns the £1m loan

↓

Growth shares can potentially capture future growth

MAIN OBJECTIVE:

MOVE FUTURE GROWTH

DISCRETIONARY TRUST

£1m transferred to trustees

↓

Potential immediate IHT considerations

↓

Trustees control the assets

↓

10-year and exit-charge regime can apply

MAIN OBJECTIVE:

MOVE ASSET OWNERSHIP INTO A FLEXIBLE SUCCESSION STRUCTURE

That is why comparing the two simply by looking at tax rates misses the point.

What About the Seven-Year Rule?

This is another area where confusion often arises.

Suppose David gives shares outright to his adult daughter Sophie.

An outright lifetime gift to an individual will generally be a:

POTENTIALLY EXEMPT TRANSFER.

If David survives seven years, it can generally fall outside his estate for IHT purposes.

A transfer into a discretionary relevant-property trust is different.

It is normally an:

IMMEDIATELY CHARGEABLE TRANSFER.

HMRC confirms that a transfer into a relevant-property trust is immediately chargeable, with further consequences possible if the settlor dies within seven years.

So:

“Put it into trust and survive seven years”

is an oversimplification.

The 10-Year Discretionary Trust Charge

Most assets held in a discretionary trust are within the:

RELEVANT PROPERTY REGIME.

HMRC confirms that relevant-property trusts can face an IHT charge at each:

10-YEAR ANNIVERSARY.

The rate can be:

UP TO 6%.

The calculation is more complicated than simply applying 6% to everything. It depends on factors including the value of the relevant property, available nil-rate band and relevant historic transfers.

A FIC itself does not have an equivalent ten-year company IHT charge.

However, if a discretionary trust owns shares in the FIC:

THE VALUE OF THOSE SHARES MAY FORM PART OF THE TRUST’S RELEVANT PROPERTY.

So using a trust to own FIC shares doesn’t make the trust’s IHT regime disappear.

What Are Trust Exit Charges?

IHT can also potentially arise when relevant property leaves a discretionary trust.

These are commonly called:

EXIT CHARGES

or:

PROPORTIONATE CHARGES.

They can arise where, for example:

capital is appointed to a beneficiary;
a beneficiary becomes absolutely entitled to an asset;
or property otherwise ceases to be relevant property.

HMRC confirms that relevant-property trusts have both ten-year charges and proportionate/exit charges.

The calculation depends on the circumstances and how long the property has been within the relevant-property regime.

Income Tax – A Major Difference

The tax on investment income can make a significant difference between the two structures.

For 2026/27, trustees of accumulation and discretionary trusts generally pay:

Dividend-type income

39.35%

Other income

45%.

There is normally a £500 tax-free amount, although this can be divided where the same settlor has established multiple accumulation or discretionary trusts. Trustees do not receive the individual dividend allowance.

This can make accumulating substantial investment income within a discretionary trust expensive.

How Does That Compare With a FIC?

A company pays:

CORPORATION TAX

rather than trust Income Tax.

A FIC holding a portfolio of shares, cash and similar investments may be a:

CLOSE INVESTMENT-HOLDING COMPANY.

A close investment-holding company is subject to the Corporation Tax main rate and cannot use the small-profits rate or marginal relief.

That currently means:

25% CORPORATION TAX

on taxable profits.

This can make a FIC considerably more attractive than a discretionary trust where investment returns will be:

RETAINED

and:

REINVESTED.

But Don’t Forget Tax When Money Leaves the FIC

This is crucial.

Suppose a FIC makes:

£100,000

of taxable profit.

The company may pay Corporation Tax first.

If the remaining profits are then paid to an individual shareholder as a dividend:

DIVIDEND TAX

may also arise.

So you cannot simply compare:

25% COMPANY TAX

with:

45% TRUST TAX

and conclude that the FIC always wins.

The FIC is often particularly effective where profits can remain inside the company and compound over a long period.

If all the profits need to be extracted personally every year, the comparison can look very different.

Trust Distributions and the Tax Pool

Trust taxation has another layer of complexity.

When trustees make discretionary income payments to beneficiaries, the payments carry a tax credit and the trustees have to maintain a:

TAX POOL.

HMRC describes the tax pool as the record used to track Income Tax paid by trustees and the tax credits attached to discretionary income payments. If the pool does not contain enough tax to support distributions, the trustees can have additional tax to pay.

A beneficiary may potentially recover some tax depending on their own circumstances.

That can make trusts useful where distributions eventually go to low-income adult beneficiaries.

But it adds another layer of administration.

Which Gives the Family More Control?

Both can provide control.

But it is a different kind of control.

Family Investment Company

Parents or grandparents might retain:

voting shares;
directorships;
investment decision-making;
and influence over dividend policy.

Meanwhile younger generations can own growth shares.

This allows a useful separation between:

CONTROL

and:

FUTURE ECONOMIC VALUE.

Discretionary Trust

The trustees control:

investments;
distributions;
administration;
and when beneficiaries receive capital.

The settlor can potentially also be a trustee, depending on the structure.

But trustees don’t own the assets beneficially.

They have legal duties and must act according to:

THE TRUST DEED

and:

THEIR DUTIES TO THE BENEFICIARIES.

Which Is Better for Minor Children?

A discretionary trust can be particularly useful where the intended beneficiaries are:

young children;
grandchildren;
future grandchildren;
or people whose circumstances may change considerably.

Instead of giving assets directly to a child, trustees can decide:

WHEN

and:

HOW

the beneficiary should receive them.

Direct ownership of FIC shares by minor children can also create additional legal and tax complications, including the parental settlements rules where income has been provided by a parent.

So where the beneficiaries are very young:

THE FLEXIBILITY OF A TRUST CAN BE VERY VALUABLE.

Which Is Better for Adult Children?

The FIC can become more attractive where children are adults.

An adult child can genuinely own:

growth shares;
dividend shares;
voting shares;
or a combination.

This can simplify future distributions because dividends can potentially be paid directly to the shareholder.

But there is an important consequence:

THEY REALLY OWN THE SHARES.

The shares form part of their personal wealth.

That brings us to asset protection.

Divorce, Bankruptcy and Asset Protection

Suppose Alex personally owns valuable FIC growth shares.

Those shares are his assets.

They could potentially become relevant in circumstances involving:

divorce;
bankruptcy;
creditors;
or death.

A discretionary beneficiary, by contrast, doesn’t ordinarily own a specified percentage of the trust fund.

The trustees decide whether and when to make distributions.

That can make a discretionary trust attractive where:

ASSET PROTECTION AND CONTROL OVER FUTURE DISTRIBUTIONS

are important family objectives.

This should not be viewed as guaranteed protection from every possible claim — family and insolvency law can be complex — but it is an important structural distinction.

What About Future Grandchildren?

This is one of the areas where a discretionary trust can be particularly powerful.

Suppose David and Emma currently have:

NO GRANDCHILDREN.

It is difficult to give shares today to people who don’t yet exist.

A discretionary trust can potentially define a class of beneficiaries that includes:

existing children;
existing grandchildren;
future grandchildren;
and potentially further descendants.

That means the family doesn’t necessarily need to decide today:

EXACTLY WHO SHOULD RECEIVE THE WEALTH IN 20 YEARS.

The trustees can respond to future circumstances.

Sometimes the Answer Is FIC + Trust

This is where the comparison gets particularly interesting.

You don’t necessarily have to choose between:

FAMILY INVESTMENT COMPANY

and:

DISCRETIONARY TRUST.

You can potentially combine them.

For example:

David and Emma

hold:

A CONTROL SHARES

in Taylor Family Investments Ltd.

Alex and Sophie

hold:

B GROWTH SHARES.

And:

TAYLOR FAMILY DISCRETIONARY TRUST

holds:

C GROWTH SHARES

for the potential benefit of:

children;
grandchildren;
future grandchildren;
and other permitted family beneficiaries.

The:

FIC

acts as the:

INVESTMENT VEHICLE.

The:

TRUST

provides:

FLEXIBILITY OVER FUTURE BENEFICIARIES.

This can be a very powerful combination.

Why Put Growth Shares Into the Trust?

Suppose the company initially has a relatively low value because it is largely funded by a shareholder loan.

A trust might acquire an appropriately structured class of growth shares while their value is low.

If the company then grows substantially over the next 20 years, some of that future growth may accrue to the trust-owned shares.

That can potentially allow future value to be held for a much wider family group.

But:

VALUATION IS CRITICAL.

The trust acquiring shares with genuine existing value for less than market value can create tax consequences.

The structure should therefore be designed before substantial value has accumulated rather than attempting to move valuable shares later.

FIC + Trust Does Mean More Administration

Combining the two structures means complying with:

TWO SETS OF RULES.

The company may require:

bookkeeping;
annual accounts;
Corporation Tax returns;
confirmation statements;
shareholder records;
board minutes;
dividend documentation.

The trust may require:

Trust Registration Service registration;
trustee records;
Trust and Estate Tax Returns;
tax-pool records;
IHT calculations;
ten-year anniversary reviews;
exit-charge calculations.

So:

DON’T ADD A TRUST JUST BECAUSE IT SOUNDS SOPHISTICATED.

There should be a clear reason for it.

Which Is Better for Property Investment?

For building a substantial long-term property portfolio, a FIC can have significant practical advantages.

A company can:

own multiple properties;
borrow;
reinvest profits;
deduct qualifying finance costs under the corporate rules;
and retain profits for future purchases.

An individual residential landlord is subject to the Section 24 finance-cost restriction.

A company is not subject to Section 24 in the same way.

There is also an important Corporation Tax point.

A close company can fall outside close investment-holding company status where it exists wholly or mainly for commercial investment in land that is let, or intended to be let, to unconnected persons.

But connected lettings can prevent that exception applying.

So:

PROPERTY FICs CAN HAVE A DIFFERENT CORPORATION TAX POSITION FROM SECURITIES-BASED FICs.

What About Existing Property?

This needs particular care.

Suppose David already personally owns a rental property worth:

£750,000.

Transferring that property into a FIC can potentially trigger:

CAPITAL GAINS TAX

and:

STAMP DUTY LAND TAX.

Putting the property into a discretionary trust can raise:

CGT

IHT

and potentially:

SDLT

depending on the facts, including any debt.

So the decision:

“FIC or trust?”

shouldn’t be made before calculating:

THE COST OF GETTING THE ASSET INTO THE STRUCTURE.

Sometimes the tax cost of transferring existing assets outweighs the future benefits.

Which Is Better for Shares and Investment Portfolios?

Where a substantial portfolio is intended to generate income that will be:

RETAINED AND REINVESTED,

a FIC can be attractive.

A securities-based FIC may pay Corporation Tax at the main rate where it is a close investment-holding company.

A discretionary trust can pay 45% on most income and 39.35% on dividend-type income.

Many dividends received by companies can also fall within the corporate dividend exemption regime, subject to the detailed rules.

This can make the corporate structure particularly useful for:

LONG-TERM COMPOUNDING.

But if the shareholders need all the profits personally every year, the eventual extraction tax must also be included.

Which Is Better for Inheritance Tax?

Neither answer is universally better.

They achieve different things.

Family Investment Company

A FIC can be particularly effective at:

REDIRECTING FUTURE GROWTH.

For example, the parent might retain a £1 million loan while future growth accrues to children’s or trust-owned growth shares.

But the £1 million loan remains within the parent’s estate unless something else is done with it.

Discretionary Trust

A discretionary trust can transfer ownership of assets away from the settlor and provide substantial flexibility over future beneficiaries.

But transfers into a relevant-property trust can be immediately chargeable and the trust can then face:

10-year charges;
exit charges;
and high Income Tax rates.

So:

A TRUST IS NOT SIMPLY A WAY OF AVOIDING 40% INHERITANCE TAX.

Can the Founder Continue to Benefit?

This needs careful thought in either structure.

FIC

If the founder has lent £1 million to the company, the company can potentially repay that loan.

The founder may also retain genuine rights attached to their own shares.

But value genuinely transferred to other shareholders cannot simply be treated as though it still belongs entirely to the founder.

Trust

If someone gives assets away but continues to benefit from them, the:

GIFT WITH RESERVATION OF BENEFIT

rules may become relevant.

There are also separate Income Tax rules for settlor-interested trusts.

So if the objective is to move assets outside an estate:

THE DONOR CANNOT SIMPLY GIVE THEM AWAY ON PAPER AND CONTINUE USING THEM AS BEFORE.

Advantages of a Family Investment Company

A FIC can potentially offer:

1. Lower tax on retained investment profits

Particularly compared with discretionary trust Income Tax rates.

2. Long-term compounding

Profits can remain within the corporate structure.

3. Loan-account flexibility

The original funder may retain access to loan repayments.

4. Control

Voting shares and directorships can allow the older generation to retain substantial control.

Future value can potentially accrue to younger generations.

6. Property investment

Companies can be particularly useful for leveraged property portfolios.

7. No company-level 10-year IHT charge

Unlike the relevant-property trust regime.

8. Direct adult family ownership

Adult children can hold genuine shares and receive dividends directly.

Disadvantages of a Family Investment Company

Potential disadvantages include:

1. Double taxation on extraction

Corporation Tax can be followed by dividend tax.

2. Shareholders genuinely own their shares

That can have consequences on divorce, bankruptcy and death.

3. Less beneficiary flexibility

It is harder to provide for unknown future beneficiaries than with a discretionary trust.

4. Valuation

Growth shares and freezer shares can require specialist valuation.

5. Legal drafting

Different share rights require carefully drafted Articles of Association and shareholder arrangements.

6. Annual company compliance

Accounts, Corporation Tax and Companies House filings are required.

7. Existing asset transfers

CGT and SDLT can make moving an established property portfolio expensive.

Advantages of a Discretionary Trust

A discretionary trust can potentially provide:

1. Maximum beneficiary flexibility

Trustees can choose between members of a broad beneficiary class.

2. Future generations

The class can potentially include grandchildren who have not yet been born.

3. Control over distributions

Beneficiaries don’t automatically receive assets simply because they reach 18.

4. Asset protection

Beneficiaries generally do not own specific trust assets outright.

5. Succession

The structure can continue for future generations subject to the trust terms and legal rules.

6. Protection for younger or vulnerable beneficiaries

Trustees can decide when distributions are appropriate.

Disadvantages of a Discretionary Trust

The principal disadvantages include:

1. High Income Tax rates

For 2026/27, 45% on most discretionary trust income and 39.35% on dividend-type income.

2. IHT on entry

Transfers into relevant-property trusts are generally immediately chargeable transfers.

3. Ten-year charges

The rate can be up to 6%.

4. Exit charges

IHT can potentially arise when relevant property leaves the trust.

5. Tax-pool administration

Income distributions can require additional trust tax calculations.

6. Specialist administration

Trustees need to comply with trust, tax and reporting requirements.

FIC vs Discretionary Trust – Which Is Better?

A Family Investment Company may be particularly suitable where:

substantial capital needs investing;
investment income will largely be reinvested;
the founders want access to the original capital;
adult children can own shares;
property investment is important;
retaining corporate control matters;
and the principal IHT objective is moving future growth.

A discretionary trust may be particularly suitable where:

flexibility over beneficiaries is crucial;
children or grandchildren are young;
future grandchildren need to be included;
asset protection is important;
the family doesn’t want beneficiaries owning assets outright;
and the proposed transfer fits within the family’s wider IHT strategy.

A FIC + discretionary trust may be particularly suitable where:

a FIC is wanted as the investment vehicle;
parents want to retain voting control;
adult children will own some growth directly;
but part of the future growth should be held flexibly for grandchildren and later generations.

10 Questions Before Choosing a FIC or Trust

1. How much wealth is involved?

A £100,000 decision can be very different from a £5 million decision.

2. Does the founder need the capital back?

If yes, loan funding into a FIC can be very useful.

3. Will investment income be retained or distributed?

This is critical when comparing Corporation Tax with trust Income Tax.

4. Are the beneficiaries adults or minors?

That can significantly change the appropriate structure.

5. Do we know who should ultimately inherit?

If not, discretionary flexibility can be valuable.

6. Do future grandchildren need to be included?

A trust can accommodate a wider future beneficiary class.

7. Is asset protection important?

Direct share ownership and discretionary beneficiary status are very different.

8. What are we investing in?

Property, securities and cash can produce different tax results.

9. Are we transferring existing assets?

Calculate CGT, SDLT and IHT before making the transfer.

10. Would FIC + trust work better than either structure alone?

Sometimes the best answer is not choosing one.

Frequently Asked Questions

Is a Family Investment Company better than a discretionary trust?

Not automatically. A FIC can be particularly effective for investing substantial sums and compounding future growth, whereas a discretionary trust can offer much greater flexibility over who eventually benefits.

Is a trust better for Inheritance Tax than a FIC?

Not necessarily. Transfers into discretionary relevant-property trusts can be immediately chargeable to IHT and the trust can face 10-year and exit charges. A FIC may instead be designed to move future growth, although assets such as shareholder loans retained by the founder remain within their estate.

Can a FIC avoid the 10-year trust charge?

The company itself is not subject to the discretionary trust 10-year IHT regime. But if a discretionary trust owns shares in the FIC, those shares may form part of the trust’s relevant property.

Can I put more than £325,000 into a discretionary trust?

Yes. £325,000 is not a maximum trust size. The issue is that a lifetime transfer above the available IHT nil-rate band can potentially produce an immediate IHT liability.

What tax does a discretionary trust pay in 2026/27?

Accumulation and discretionary trusts generally pay 45% on most income and 39.35% on dividend-type income.

What is the 10-year trust charge?

Relevant-property trusts can face an IHT charge at each ten-year anniversary. The rate can be up to 6%, although the actual calculation depends on the trust’s circumstances.

Can a discretionary trust own shares in a Family Investment Company?

Yes. This can combine the investment function of a FIC with the beneficiary flexibility of a discretionary trust.

Can parents retain control of a FIC?

Potentially. Voting/control shares can be retained by parents while other share classes participate in future growth.

Is a FIC good for property investment?

It can be. Companies are not subject to the residential Section 24 finance-cost restriction in the same way as individual landlords. Commercial property investment companies letting to unconnected persons can also fall outside the close investment-holding company regime.

Is a FIC good for grandchildren?

Potentially, but where grandchildren are young or not yet born, a discretionary trust owning a class of FIC growth shares can sometimes provide greater flexibility than direct ownership.

The Key Question Isn’t “Which Pays Less Tax?”

A Family Investment Company and a discretionary trust do fundamentally different jobs.

So I wouldn’t start with:

“Which structure has the lowest tax rate?”

Instead, I would start with:

WHO NEEDS CONTROL?

WHO NEEDS THE INCOME?

WHO SHOULD BENEFIT FROM FUTURE GROWTH?

DOES THE FOUNDER NEED THEIR ORIGINAL CAPITAL BACK?

ARE THE BENEFICIARIES ADULTS, CHILDREN OR FUTURE GRANDCHILDREN?

DO WE NEED ASSET PROTECTION?

IS THE FAMILY INVESTING IN PROPERTY, SHARES OR BOTH?

WHAT SHOULD HAPPEN TO THE WEALTH IN 10, 20 OR 30 YEARS?

Once those questions have been answered, the tax comparison becomes much more meaningful.

How Bicknell Business Advisers Can Help

At Bicknell Business Advisers, we can help families compare Family Investment Companies, discretionary trusts and combined structures, including:

FIC feasibility and tax modelling;
FIC vs trust comparisons;
loan versus equity funding;
growth and freezer shares;
property investment structures;
Corporation Tax;
trust taxation;
Inheritance Tax;
CGT;
SDLT;
associated-company implications;
share valuation requirements;
extraction planning;
and coordination with specialist solicitors for trusts, Articles of Association, wills and other legal documentation.

The objective shouldn’t be to create the most complicated structure.

It should be to create a structure that matches:

WHAT THE FAMILY WANTS ITS WEALTH TO DO OVER THE NEXT 10, 20 OR 30 YEARS.

For some families that will be a:

FAMILY INVESTMENT COMPANY.

For others it will be a:

DISCRETIONARY TRUST.

And for some:

FIC + TRUST

may provide the combination of investment, control and succession flexibility they are looking for.

About the Author

Landlord Repairs, Improvements or Replacements? What Can You Claim for Tax?

Is property work a repair, improvement or replacement? Learn what landlords can deduct, how RDI works and what changed for holiday lets after April 2025.

Repairs, Capital Improvements, Replacement of Domestic Items and the New Rules for Holiday Lets After April 2025

By Steve Bicknell FCMA, CGMA

You spend £15,000 on a new kitchen in a rental property.

Is it:

an allowable repair that reduces your rental profit now;
a capital improvement that may only become relevant when you sell;
a replacement domestic item;
or a mixture of different things?

What about replacing single-glazed windows with double glazing? A new boiler? Rewiring? New carpets? Replacing a fridge? Refurbishing a property immediately after buying it?

These questions matter because repairs and capital improvements are treated very differently for tax.

And there has been another important change.

FROM APRIL 2025, THE SPECIAL FURNISHED HOLIDAY LETTINGS TAX REGIME ENDED

Former Furnished Holiday Lets (FHLs) are now generally part of the same UK or overseas property business as other residential lettings. The special FHL capital allowance treatment for new expenditure has gone, while Replacement of Domestic Items Relief can now apply to former FHLs. Existing pre-repeal capital allowance pools can continue to receive writing-down allowances.

So whether you own a buy-to-let, HMO or holiday let, understanding the difference between:

REPAIR • IMPROVEMENT • REPLACEMENT • CAPITAL

has become more important than ever.

Quick Answer – Repair, Improvement or Replacement?

Here are some common examples.

Landlord expenditure	Possible tax treatment
Painting and decorating	Repair – normally revenue
Replacing broken roof tiles	Repair – normally revenue
Replacing an old roof with a modern equivalent	Can still be a repair
Replacing single glazing with modern double glazing	Can be a repair – modern equivalent
Refurbishing an old kitchen to a similar modern standard	Can be a repair
Building an extension	Capital improvement
Adding an extra bathroom where none existed	Normally capital improvement
Replacing an old fridge with an equivalent fridge	RDI may apply
Buying the first fridge for a previously unfurnished property	Not RDI – there is nothing being replaced
Replacing old carpets with equivalent carpets	RDI may apply
Replacing a boiler	Usually considered under repair rules rather than RDI
Major structural alteration changing the property	Likely capital
Furniture for a former FHL after April 2025	RDI may apply if it replaces an existing item

These are general examples. The precise facts matter.

The size of the bill alone doesn’t decide the tax treatment.

A £30,000 roof replacement can potentially be a repair, while a much smaller expenditure creating something that did not previously exist could be capital.

HMRC’s guidance confirms that common deductible repairs include decorating, damp and rot treatment, repairing windows and doors, repointing and replacing roof slates, flashing and gutters.

Why Does Repair vs Improvement Matter?

For a property business, a qualifying revenue repair can generally be deducted when calculating taxable rental profits.

For example:

Rental income: £30,000
Allowable repairs: £10,000

Subject to the other expenses and tax rules, that £10,000 can reduce the property’s taxable rental profit.

A capital improvement isn’t deducted from rental income in the same way.

It may instead form part of the property’s capital cost and potentially become relevant when calculating a future Capital Gains Tax liability.

So getting the classification wrong can significantly change when — or even whether — tax relief is available.

What Is a Repair?

HMRC describes a repair as broadly restoring an asset by replacing subsidiary parts of the whole.

For example, replacing storm-damaged roof tiles can be a repair.

By contrast, expenditure that significantly improves an asset beyond its original condition is generally capital.

A useful starting question is therefore:

ARE YOU RESTORING WHAT WAS ALREADY THERE OR CREATING SOMETHING NEW OR BETTER?

But even that isn’t the whole story.

The “Entirety” Test – What Are You Actually Replacing?

One of the most important concepts is the entirety.

HMRC’s basic position is:

repairing a worn or dilapidated asset is normally revenue expenditure;
replacing the asset as a whole is normally capital.

But identifying the asset is crucial.

Consider a roof.

If the roof is regarded as a subsidiary part of the house, replacing a worn-out roof does not necessarily mean you’ve replaced the entire asset.

The asset may be:

THE HOUSE

not:

THE ROOF

HMRC similarly gives an example of a fitted kitchen being stripped out and replaced with an equivalent modern kitchen. The kitchen is treated as part of the house rather than a separate entirety, and on those facts HMRC treats the work as a repair.

Contrast that with demolishing an entire separate garage and building a new one. HMRC’s example treats that as replacing the entirety and therefore capital expenditure.

This principle is reflected in the longstanding case-law concept of repair being the renewal or replacement of subsidiary parts of a larger whole.

Does Replacing Something With a Better Modern Version Make It an Improvement?

Not necessarily.

This is particularly important with older properties.

Suppose you replace:

single-glazed windows

with:

modern double-glazed windows.

The new windows are clearly technically superior.

But double glazing is now a normal modern replacement.

HMRC accepts that using modern materials does not automatically turn a repair into an improvement.

The important question is whether, broadly, the asset continues to perform the same function or has been substantially enhanced or changed.

The same principle can apply to replacing:

lead pipes with modern pipework;
outdated electrical equipment;
old heating systems;
obsolete building materials;
or equipment that is no longer legally or practically available.

Your existing repair guidance also highlights modern-equivalent replacements, including replacing single-glazed windows with double glazing and old lead pipes with modern materials.

So:

NEWER DOES NOT AUTOMATICALLY MEAN CAPITAL

HMRC even acknowledges that changing technology can mean a replacement lasts longer or performs more efficiently without necessarily changing a repair into an improvement.

Kitchens – Repair or Improvement?

Kitchen refurbishments are a classic problem.

Suppose a landlord removes:

old kitchen units;
worktops;
sink;
fitted hob;
tiles;
and worn flooring,

and replaces them with modern equivalents of broadly similar quality.

That can potentially be a repair to the property, despite the fact that virtually the entire fitted kitchen has been replaced.

HMRC has an example where the fitted kitchen is completely renewed with equivalent-quality units in a different layout. HMRC treats the house as the entirety and the kitchen refurbishment as a repair.

But now suppose the landlord:

substantially enlarges the kitchen;
knocks down walls;
creates a large kitchen/diner;
adds an island and facilities that did not previously exist;
installs materially superior fittings as part of a major upgrade.

Now there may be a significant capital improvement element.

The facts matter.

One Refurbishment Can Contain Both Repairs and Improvements

This is particularly important.

Imagine a landlord spends £60,000 refurbishing a rental property.

The project includes:

Work	Possible treatment
Redecoration	Revenue repair
Roof repairs	Revenue repair
Equivalent replacement kitchen	Potentially revenue repair
Repairing existing wiring	Potentially revenue
New extension	Capital
Creating second bathroom	Capital
New fridge replacing old fridge	Potential RDI
First dishwasher where none existed	Not RDI; consider capital treatment

It would be wrong simply to say:

“The refurbishment cost £60,000, therefore it must all be capital.”

Equally, it would be wrong to assume that because builders describe everything as “refurbishment”, the whole £60,000 is deductible.

HMRC acknowledges that a programme of works can contain some repairs and some alterations or improvements.

That makes detailed invoices and cost breakdowns extremely important.

Ask your builder to itemise the work rather than issuing an invoice simply saying:

“Property refurbishment – £60,000.”

That description isn’t very helpful when somebody has to determine the tax treatment two years later.

Beware: Repairs Can Sometimes Become Part of a Capital Project

There is an important qualification.

If apparently repair-type expenditure is incidental to a wider capital renovation or conversion, its treatment may be affected.

HMRC notes that certain repair expenditure incidental to the renovation or conversion of part of a building can be treated as part of the capital cost of that project.

So you cannot necessarily split a fundamental capital transformation into artificial pieces and claim the decorating, plastering and similar consequential work as standalone repairs.

Again, the purpose and character of the overall work matter.

Bought a Run-Down Property? Repairs Aren’t Automatically Capital

This is another area where landlords frequently get confused.

Suppose you buy a property and immediately spend £40,000 repairing it.

Is the £40,000 automatically capital because the work happened immediately after acquisition?

NO – NOT AUTOMATICALLY

Timing alone does not decide the issue.

However, HMRC will consider the condition of the property when acquired.

If you buy a derelict or seriously run-down property that cannot sensibly be used or let without major works, expenditure putting it into usable condition may be capital. HMRC specifically lists refurbishment or repair of a property bought in a derelict or run-down state among circumstances that can represent capital expenditure.

But the position can be different where:

the property was already capable of being let;
you paid a normal market price;
defects subsequently became apparent;
and the work restores rather than fundamentally improves the property.

The source material similarly identifies whether the property was lettable when purchased, whether the purchase price reflected the defects, and whether the works formed part of an improvement project as relevant factors.

Worked Example – £50,000 Refurbishment After Purchase

Consider an illustrative example based on the type of case we see in practice.

A landlord purchases a residential investment property.

It is not bought at a substantial discount because of serious disrepair and is capable of being occupied.

After purchase, problems emerge and approximately £50,000 is spent on:

electrical repairs;
damp treatment;
flooring;
structural repairs;
decorating;
and replacing worn components.

The important questions aren’t simply:

“Was the work expensive?”

or:

“Was it done shortly after purchase?”

Instead we need to ask:

Was the property capable of use when acquired?
Did the purchase price reflect serious defects?
Was the expenditure restoring what already existed?
Was an entire separate asset replaced?
Was the character of the property changed?
Was this actually a scheme to substantially improve or transform the property?

Depending on the answers, substantial expenditure shortly after acquisition can still contain deductible repairs.

Replacement of Domestic Items Relief – RDI

Repairs are only part of the story.

Residential landlords can also have Replacement of Domestic Items Relief.

This is particularly important for furnished and partly furnished properties.

RDI can apply to the replacement of domestic items such as:

beds;
sofas;
tables and chairs;
carpets;
curtains;
crockery and cutlery;
televisions;
fridges;
freezers;
washing machines;
and similar household items.

The key word is:

REPLACEMENT

First Purchase vs Replacement

Suppose you start letting an unfurnished property and buy a sofa for £1,000.

There was no previous sofa.

That isn’t a replacement, so RDI doesn’t apply merely because the sofa is used by the tenant.

Now suppose several years later that sofa is worn out and replaced.

That is potentially within RDI.

The underlying material makes exactly this distinction: the relief is concerned with replacing an existing domestic item rather than purchasing something for the first time.

What If the New Item Is Better Than the Old One?

This needs careful consideration.

Suppose the tenant’s old fridge needs replacing.

An equivalent modern replacement costs:

£600

Instead, the landlord buys a premium American-style fridge-freezer costing:

£1,800

RDI does not necessarily give relief for the entire £1,800.

Broadly, where the new item represents an improvement beyond a reasonable modern equivalent, the additional improvement cost can be excluded from the relief.

The key distinction is again between:

modern equivalent

and:

genuine upgrade.

So replacing an old basic appliance with today’s ordinary equivalent is different from deliberately moving into a substantially higher specification.

Fixtures Aren’t Necessarily Replacement Domestic Items

It is also important to distinguish movable domestic items from parts of the building.

A freestanding fridge, for example, can be an asset in its own right. HMRC contrasts this with fixtures forming part of the building.

Items such as:

boilers;
fitted sanitary ware;
radiators;
plumbing systems;
and other fixtures

will generally need to be considered under the repairs versus capital rules rather than simply being put through RDI.

This distinction is also made in the source material between movable domestic items and fixtures forming part of the dwelling.

Holiday Lets – The Rules Changed From April 2025

This is a major change for holiday-let owners.

Before abolition, qualifying Furnished Holiday Lettings benefited from special tax treatment.

For capital allowances, qualifying FHL businesses could claim allowances on plant and machinery such as:

furniture;
white goods;
and other qualifying equipment within the property.

Ordinary residential property businesses generally could not claim capital allowances on those dwelling-house items.

That changed when the FHL regime was abolished.

The special rules ceased from:

6 April 2025 for Income Tax, and
1 April 2025 for Corporation Tax accounting periods, subject to the detailed commencement provisions.

What Does That Mean for a Holiday Let in 2026?

A former FHL is now generally brought into the same UK or overseas property business rules as other property lettings.

For new expenditure, the old FHL capital allowance advantage no longer applies.

Instead, former FHL businesses can potentially use:

REPLACEMENT OF DOMESTIC ITEMS RELIEF

in line with other property businesses.

This is a major practical change.

For example, before abolition a qualifying FHL might have claimed capital allowances on qualifying furniture and white goods.

After abolition, a replacement sofa or fridge in a former FHL needs to be considered under the ordinary property rules, including RDI where its conditions are met.

What Happens to Old FHL Capital Allowance Pools?

They don’t simply disappear.

HMRC confirms that where an existing FHL business had an ongoing capital allowance pool before abolition, the business can continue to claim writing-down allowances on that historic pool.

But new expenditure incurred after the relevant abolition date must be considered under the ordinary property-business rules.

So there are effectively two questions:

OLD EXPENDITURE

Was it already in a qualifying pre-abolition FHL capital allowance pool?

NEW EXPENDITURE

What relief, if any, is available under the normal property-business rules?

This distinction is particularly important for established holiday-let businesses with historic capital allowance claims.

What About Capital Allowances on Dwellings?

The abolition of FHL treatment means former holiday lets no longer have the special FHL exemption that allowed qualifying plant and machinery allowances on items within the dwelling.

HMRC is explicit that FHLs previously obtained capital allowances on furniture and white goods whereas non-FHL property businesses did not — and still do not — qualify for capital allowances on those items.

Therefore, don’t assume:

“It’s a holiday let, so we can claim capital allowances.”

For new expenditure, that old FHL treatment has gone.

What About HMOs?

HMOs can require particular care.

Simply describing an area as a “communal area” doesn’t necessarily take it outside the dwelling-house capital allowance restrictions.

The precise property layout, nature of occupation and expenditure need to be considered.

So I would be wary of broad claims that furniture or equipment in HMO common areas automatically qualifies for capital allowances.

Repairs and Improvements Can Affect Capital Gains Tax Later

If expenditure is capital rather than revenue, that doesn’t necessarily mean it is lost forever.

Qualifying capital enhancement expenditure may potentially be deductible when calculating the gain on a later disposal of the property, subject to the CGT rules.

That makes good record keeping important.

If you spend £25,000 on a genuine capital improvement in 2026 and sell the property ten years later, you don’t want to discover that the invoices and evidence disappeared nine years ago.

Keep records of:

invoices;
contracts;
planning documents;
photographs before and after;
specifications;
bank payments;
and explanations of the work undertaken.

Don’t Forget VAT – Could a Development Company Help?

There is another tax that can make a huge difference to major property projects:

VAT

Ordinary residential letting is generally an exempt activity for VAT purposes.

That can mean VAT incurred on refurbishment or development costs isn’t recoverable in the way a VAT-registered taxable business might expect.

But property development and conversion can have very different VAT consequences.

For example, HMRC’s current construction guidance provides for:

zero-rating of qualifying new dwellings;
5% VAT for certain conversions to a different residential use;
5% VAT for qualifying renovation or alteration of residential premises that have been empty for at least two years;
and potentially zero-rating of the first sale or long lease following certain qualifying non-residential-to-residential conversions.

This is why, in the right circumstances, undertaking a genuine development project through a development company can potentially create VAT advantages.

We have previously looked at this in:

The VAT Advantages of a Development Company

Read our Development Company VAT article

However:

DO NOT INSERT A DEVELOPMENT COMPANY AFTER THE EVENT JUST TO TRY TO RECOVER VAT

The structure, contractual arrangements, ownership, intended onward supply and VAT position need considering before significant expenditure is incurred.

This is an area where planning before the project begins can be considerably more valuable than tax advice after the invoices have already been paid.

10 Common Landlord Mistakes

1. Assuming anything expensive must be capital

The amount spent does not determine the treatment.

2. Assuming anything described as “maintenance” on an invoice is deductible

Tax treatment depends on what was actually done, not the invoice heading.

3. Assuming new materials automatically mean improvement

Modern equivalent replacements can still be repairs.

4. Assuming a new kitchen is always capital

An equivalent fitted-kitchen replacement can potentially be a repair.

5. Assuming work immediately after buying a property is always capital

The property’s condition, price and purpose of the works matter.

6. Claiming RDI on the first furniture bought for a property

There needs to be a replacement.

7. Claiming the full cost of a substantial upgrade under RDI

A genuine improvement element may need restricting.

8. Treating every item in one refurbishment project the same way

A project can contain repairs, capital improvements and RDI items.

9. Continuing to claim FHL capital allowances on new expenditure after abolition

The special FHL treatment ended from April 2025.

10. Thinking about VAT after the development has started

VAT planning can depend on the structure and intended transaction, so it should be considered before contracts and expenditure are committed.

Landlord Repair or Improvement – Decision Table

Question	If YES	If NO
Is the work restoring something already there?	May be a repair	Consider capital
Is the whole separate asset being replaced?	More likely capital	Repair may be possible
Is it merely the nearest modern equivalent?	Can still be repair	Consider improvement
Does the property do something substantially new afterwards?	Likely improvement	Repair more likely
Is a movable domestic item being replaced?	RDI may apply	Consider other rules
Was there an old item to replace?	Continue RDI test	No RDI
Is the replacement substantially better?	Improvement restriction may apply	Full RDI may be possible
Is it a former FHL after April 2025?	Ordinary property rules now generally apply	—
Is there an old FHL capital allowance pool?	WDA may continue	No new FHL pool
Is this a major development/conversion?	Consider VAT before starting	Normal landlord VAT position may apply

Frequently Asked Questions

Is replacing a kitchen tax deductible for a landlord?

Potentially. Replacing an existing fitted kitchen with a modern equivalent can be a repair. HMRC gives an example where an equivalent replacement fitted kitchen is treated as a repair to the house.

Is replacing a roof a repair or improvement?

Replacing or repairing a worn roof can potentially be a revenue repair because the roof is a subsidiary part of the building. Adding another storey or fundamentally changing the building would be capital.

Is double glazing a repair or improvement?

Replacing old windows with the modern equivalent can potentially remain a repair. The fact that modern materials are technically superior does not automatically create a capital improvement.

Can a landlord claim for a new boiler?

Replacing an existing boiler with a modern equivalent can potentially be a repair. The precise circumstances and whether the heating system is being substantially improved should be considered.

Can landlords claim for furniture?

Where an existing domestic item supplied to tenants is replaced, Replacement of Domestic Items Relief may be available subject to its conditions. The initial purchase of an item where there was nothing to replace generally doesn’t qualify for RDI.

Can I claim a new fridge in a holiday let?

Since abolition of the FHL regime, new expenditure no longer gets the former FHL capital allowance treatment. If an existing fridge is being replaced, RDI may potentially apply instead.

Can holiday lets still claim capital allowances?

The special FHL capital allowance treatment for new expenditure has ended. Existing qualifying pre-abolition pools can continue to receive writing-down allowances.

Can refurbishment costs immediately after buying a property be deducted?

Sometimes. Timing alone isn’t decisive. The condition of the property when purchased, whether it was usable, whether the price reflected its defects and the nature and purpose of the works all need consideration.

What happens to capital improvements?

They aren’t normally deducted from rental profits. Qualifying enhancement expenditure may potentially become relevant to the CGT calculation when the property is eventually disposed of.

Can I recover VAT on refurbishment costs?

It depends on the activity and structure. Ordinary residential letting is generally VAT exempt, but new construction, qualifying conversions and certain renovations can have special VAT treatment.

Before Starting a Major Refurbishment – Get the Tax Treatment Right

If you are about to spend £20,000, £50,000 or £100,000 on a property, don’t wait until the year-end accounts are prepared before thinking about tax.

Before starting, consider:

INCOME TAX / CORPORATION TAX

Which costs are repairs and which are capital?

REPLACEMENT OF DOMESTIC ITEMS

Which furniture, appliances and furnishings genuinely replace existing items?

CAPITAL ALLOWANCES

Are there historic pools or qualifying assets outside the normal dwelling restrictions?

CAPITAL GAINS TAX

Which improvement costs should be retained for a future disposal?

VAT

Is this actually a development or conversion where the VAT treatment could be different?

STRUCTURE

Should the development activity be undertaken personally, through the existing property company or potentially through a separate development company?

That last question needs answering before the project begins, not after completion.

How Bicknell Business Advisers Can Help

Property refurbishment frequently involves several different taxes at the same time.

We can help review:

repairs versus capital improvements;
major refurbishment programmes;
Replacement of Domestic Items Relief;
former FHL expenditure after April 2025;
historic FHL capital allowance pools;
property acquisition and pre-letting expenditure;
VAT on developments and conversions;
development-company structures;
and the records required for future Capital Gains Tax calculations.

For larger projects, it is often worth reviewing the proposed works and builders’ estimates before work starts so that the accounting, tax and VAT treatment can be considered while there is still an opportunity to plan.

The Key Question: What Has Actually Changed?

When deciding whether property expenditure is a repair or an improvement, don’t focus only on:

how much it cost

or:

how new it looks.

Instead ask:

WHAT WAS THERE BEFORE?

WHAT WORK WAS ACTUALLY DONE?

WHAT IS THERE AFTERWARDS?

HAS THE PROPERTY OR ASSET SIMPLY BEEN RESTORED — OR HAS IT BEEN FUNDAMENTALLY IMPROVED?

Then separately consider whether any movable domestic items qualify for Replacement of Domestic Items Relief.

And for holiday-let owners, remember the major change:

THE SPECIAL FHL TAX REGIME ENDED IN APRIL 2025

Former FHLs are now generally within the same property-business regime as other residential lettings. New expenditure no longer receives the old FHL capital allowance treatment, although historic qualifying pools can continue, and RDI may now be available.

Getting the answer right can determine whether tax relief is obtained now, later, or not at all.

Forgot to Declare Rental Income? What to Do Before HMRC Contacts You

The VAT advantages of a development company

Is it a Repair, Replacement (RDI) or Improvement?

About the Author

Should Your Limited Company Buy a New or Second-Hand Electric Car?

New or Second-Hand Electric Car Through Your Limited Company?

New vs Used EV Tax Explained – Capital Allowances, BIK, VAT, Grants and Mileage for 2026/27

By Steve Bicknell FCMA, CGMA

You have found two electric cars.

One is brand new.

The other is two or three years old.

The second-hand car may be thousands of pounds cheaper — but the new car could potentially qualify for 100% First-Year Capital Allowances.

So which is actually better?

For a limited company in 2026/27, the answer is more complicated than simply comparing the purchase prices.

You need to consider:

100% capital allowances on qualifying new EVs;
14% writing-down allowances on second-hand EVs;
the 4% electric company-car Benefit in Kind rate;
the original list price of a second-hand car;
Corporation Tax;
VAT;
government EV grants;
charging costs;
business mileage;
depreciation;
Vehicle Excise Duty;
finance;
and what happens when you eventually sell the car.

And there is a third option which shouldn’t be overlooked:

BUY THE EV PERSONALLY AND CLAIM 55P PER BUSINESS MILE.

Let’s compare them.

Quick Answer – New EV, Used EV or Personal Ownership?

	New EV – Company	Used EV – Company	Personally Owned EV
Company funds purchase	Yes	Yes	No
100% zero-emission FYA	Potentially yes	No	No company CA
Capital allowances	Potentially 100%	Normally 14% WDA	—
2026/27 EV BIK	4%	4%	None
BIK based broadly on original list price	Yes	Yes	—
Electric Car Grant	Potentially	No	Potentially on eligible new EV
AMAP – first 10,000 business miles	No	No	55p
Company owns car	Yes	Yes	No
VAT on purchase with private availability	Usually blocked	Usually blocked	—
Initial depreciation	Potentially high	Often substantially absorbed already	Personal cost

The biggest tax difference between buying a new and second-hand EV through your company is generally the timing of the:

CAPITAL ALLOWANCES.

Why Are New Electric Cars So Tax-Efficient?

A qualifying new and unused zero-emission car can currently qualify for a:

100% FIRST-YEAR ALLOWANCE

That potentially allows the company to deduct the entire qualifying cost from taxable profits in the relevant accounting period.

For Corporation Tax purposes, the current relief runs until:

31 MARCH 2027

and for Income Tax purposes until:

5 APRIL 2027.

This relief is particularly valuable because cars are excluded from:

Annual Investment Allowance;
Full Expensing;
and the general 40% First-Year Allowance.

A qualifying new zero-emission car has its own specific 100% FYA.

Example – £50,000 New Electric Car

Suppose Consultancy 4 Business Ltd buys a qualifying brand-new zero-emission car for:

£50,000

Potential First-Year Allowance:

£50,000 × 100% = £50,000

If the company obtains tax relief at 25%, the simple illustrative Corporation Tax reduction is:

£50,000 × 25% = £12,500

POTENTIAL CT SAVING: £12,500

That is an extremely valuable timing advantage.

But it does not mean a £50,000 EV really costs £37,500.

The company has still spent £50,000 and needs to consider depreciation, finance, running costs, BIK and eventual disposal.

The actual Corporation Tax benefit also depends on the company’s taxable profits and applicable Corporation Tax rate.

What Counts as New and Unused?

Don’t assume that:

“new to me”

means:

“new and unused”

for capital allowance purposes.

The conditions need to be checked.

Limited mileage arising from matters such as delivery, testing, customer test drives or demonstrator use does not necessarily mean a vehicle is second-hand.

Similarly, pre-registration does not automatically prevent qualification.

So if you’re considering a:

PRE-REGISTERED EV

or:

DEMONSTRATOR

it is worth checking the facts before assuming the 100% allowance has been lost.

What About a Second-Hand Electric Car?

A second-hand EV does not qualify for the special 100% zero-emission car FYA.

Instead, a zero-emission car will generally fall within the:

MAIN-RATE CAPITAL ALLOWANCE POOL.

The main writing-down allowance rate reduced from 18% to:

14%

from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.

Accounting periods spanning the change can have a hybrid rate.

Example – £50,000 Second-Hand EV

Suppose Consultancy 4 Business Ltd instead pays:

£50,000

for a second-hand zero-emission car.

Using a simple full-year 14% illustration:

£50,000 × 14% = £7,000

At an illustrative 25% Corporation Tax rate:

£7,000 × 25% = £1,750

Compare that with our qualifying new car:

	New EV	Used EV
Purchase price	£50,000	£50,000
Illustrative first-year CA	£50,000	£7,000
Illustrative CT reduction @25%	£12,500	£1,750
Difference in first-year CT relief		£10,750

That is a very substantial difference.

But it is primarily a difference in the timing of tax relief.

The second-hand EV hasn’t necessarily lost all the remaining capital allowances — they are generally obtained more slowly.

But the Used EV Could Be £20,000 Cheaper

This is where tax relief can distract from the real commercial decision.

Suppose the choice is:

Brand-new EV

£50,000

versus:

Three-year-old equivalent

£30,000

The new EV may potentially produce a £50,000 FYA.

The £30,000 used EV would have an illustrative first-year 14% WDA of:

£30,000 × 14% = £4,200

At 25% CT, that’s an illustrative first-year tax reduction of:

£1,050

But the used car required:

£20,000 LESS CASH

to buy.

That’s considerably more than the difference in our illustrative first-year Corporation Tax savings.

So remember:

DON’T SPEND £1 SIMPLY TO SAVE 25P OF TAX.

Tax is only part of the calculation.

Are There Still Government Grants for Electric Cars?

YES.

The Government’s Electric Car Grant currently gives discounts on qualifying new zero-emission cars.

There are two grant bands:

Band 1

UP TO £3,750

Band 2

UP TO £1,500

You don’t normally claim the grant yourself.

The seller applies the grant as a discount to the purchase price.

But not every electric car qualifies.

The scheme applies to approved vehicles satisfying conditions including zero tailpipe emissions, minimum range, warranties, sustainability requirements and price limits.

The main Electric Car Grant price cap is currently £37,000 RRP, although particular rules can allow certain variants in the same interpolation family up to £42,000.

That means our hypothetical £50,000 new EV would not ordinarily qualify for the standard Electric Car Grant.

This is important — don’t add £3,750 to the tax saving on a £50,000 car unless the particular vehicle actually qualifies.

The list of eligible vehicles changes, so check the current Government list before ordering.

New EV – Potential Double Advantage

For an eligible qualifying new EV, there could therefore be:

ELECTRIC CAR GRANT

plus:

100% FIRST-YEAR ALLOWANCE

plus the low:

4% EV BIK RATE.

That can significantly narrow the economic difference between a new and nearly-new EV.

Benefit in Kind – New and Used EVs Get the Same Percentage

The low Benefit in Kind rate remains one of the biggest attractions of putting an EV through a limited company.

For a zero-emission company car, the appropriate percentage is:

2026/27

4%

2027/28

5%

2028/29

7%

2029/30

9%

So a second-hand EV doesn’t suffer a higher percentage simply because it is used.

But there is a trap.

BIK Uses List Price – Not What You Paid Second-Hand

Suppose your company buys a three-year-old EV for:

£30,000

but its relevant original list price was:

£50,000.

The company-car BIK is broadly based on the relevant list price and taxable accessories — not the £30,000 your company paid.

At 4%:

£50,000 × 4% = £2,000 taxable benefit

So the BIK could broadly be the same as on a brand-new £50,000 EV.

THE USED PRICE FALLS.

THE BIK LIST PRICE DOESN’T FALL WITH IT.

This is an important consideration when looking at heavily depreciated premium EVs.

What Does a £2,000 EV Benefit Actually Cost?

For a £50,000 relevant list price and a 4% BIK percentage:

TAXABLE BENEFIT = £2,000

Illustratively, the employee/director’s Income Tax could be:

Tax rate	Illustrative tax
20%	£400
40%	£800
45%	£900

The company will also normally pay Class 1A National Insurance.

Even after allowing for that, the BIK can remain dramatically lower than on many petrol or diesel company cars.

New £50,000 vs Used £30,000 – The Interesting Comparison

	New EV	Used EV
Company purchase price	£50,000	£30,000
Original list price	£50,000	£50,000
2026/27 BIK rate	4%	4%
Illustrative taxable benefit	£2,000	£2,000
Potential first-year CA	£50,000	£4,200*
Illustrative CT reduction @25%	£12,500	£1,050*
Cash purchase difference	—	£20,000 cheaper

*Simple 14% full-year illustration.

Now the decision is much less obvious.

The new car wins on immediate tax relief.

The used car wins on purchase price.

And both have the same illustrative BIK because they originally had the same list price.

Depreciation May Matter More Than Tax

This is probably the most important commercial point in this article.

Imagine a new EV costs:

£50,000

and is worth:

£25,000

three years later.

That’s a:

£25,000 LOSS IN VALUE.

Receiving accelerated Corporation Tax relief doesn’t eliminate that economic loss.

A two or three-year-old EV may allow you to buy after somebody else has absorbed much of the initial depreciation.

So the real comparison is closer to:

PURCHASE PRICE

minus:

EXPECTED RESALE VALUE

plus:

FINANCE AND RUNNING COSTS

plus:

PERSONAL BIK TAX

minus:

COMPANY TAX RELIEF.

What Happens When the Company Eventually Sells the EV?

Don’t look at the 100% FYA in isolation.

Capital allowance disposal rules apply when the company eventually sells the vehicle.

So claiming £50,000 upfront doesn’t mean the proceeds received when the car is sold are ignored.

A proper whole-life calculation should therefore consider:

PURCHASE + OWNERSHIP + DISPOSAL.

What About VAT When Buying an Electric Car?

This is one of the most misunderstood EV tax rules.

ELECTRIC DOES NOT MEAN VAT-FREE.

An electric car is still a car for VAT purposes.

VAT on buying a car is generally blocked where the vehicle is available for private use.

Full VAT recovery is normally only possible where the relevant conditions are satisfied — for example, where the car is not available for private use or is acquired for certain qualifying activities.

So if a director buys an electric car through the company and uses it both privately and for business:

DO NOT ASSUME THE COMPANY CAN RECLAIM THE PURCHASE VAT.

What About VAT on Leasing an EV?

Leasing is different.

Where a VAT-registered business leases a car that has private use, it can normally recover:

50% OF THE VAT ON THE LEASE RENTAL

subject to the normal rules.

VAT on separately charged maintenance can potentially have different treatment.

This is one reason why a proper comparison between:

cash purchase;
HP;
PCP;
and lease

is worthwhile before signing the agreement.

What About VAT on Charging an Electric Car?

This is another area where the rules differ from petrol and diesel.

HMRC says VAT incurred by a business on charging an EV can be recovered to the extent it relates to business use where charging takes place:

at the workplace; or
at a public charging point,

subject to the normal VAT rules.

Mileage records should be maintained to identify business and private use where necessary.

But home charging by an employee is different.

Where an employee charges an EV at home, HMRC’s published position is that the electricity is supplied to the employee, not the employer.

The employer therefore cannot currently recover VAT on that home electricity under HMRC’s published guidance.

Does the VAT Fuel Scale Charge Apply to an Electric Car?

This needs particular care.

Businesses with petrol or diesel cars sometimes reclaim VAT on road fuel and account for private use using HMRC’s:

VAT ROAD FUEL SCALE CHARGE.

For 1 May 2026 to 30 April 2027, the lowest CO₂ band — 120g/km or less — has an annual VAT-inclusive scale-charge value of £657.

But:

DON’T SIMPLY APPLY THE £657 SCALE CHARGE TO AN EV BECAUSE IT HAS 0G/KM CO₂.

HMRC’s VAT Notice deals with electricity for charging EVs separately from its rules on road fuel and fuel scale charges.

HMRC says businesses should identify business/private electricity use through mileage records where appropriate.

The practical VAT treatment therefore depends on:

where the EV is charged;
who receives the supply of electricity;
who pays for it;
whether the business has incurred recoverable VAT;
and the business/private mileage split.

This is another reason to keep good mileage and charging records.

Are There Still Grants for EV Chargers?

YES.

The Workplace Charging Scheme currently contributes towards the purchase and installation of EV chargepoints at eligible workplaces.

The scheme can cover up to:

75% OF THE COST

subject to a maximum of:

£500 PER SOCKET

and:

40 SOCKETS

across all sites per applicant.

The current scheme closes on:

31 MARCH 2027.

Eligibility conditions apply, so check them before committing to the installation.

Can the Company Also Claim Tax Relief on a Charger?

Potentially.

Qualifying expenditure on new and unused electric vehicle chargepoints can currently qualify for:

100% FIRST-YEAR ALLOWANCES.

The current relief is available until:

31 March 2027 – Corporation Tax

5 April 2027 – Income Tax

So a business considering workplace charging should potentially investigate both the grant and the capital allowance position.

The interaction with grant funding needs to be taken into account when determining the qualifying expenditure.

What About Charging at Home?

The tax position shouldn’t be confused with the VAT position.

For a fully electric company car, HMRC says an employer does not have to report charging provided for the employee’s company EV as a taxable benefit.

For reimbursement of business mileage in a company EV, HMRC now publishes separate advisory electric rates.

From:

1 SEPTEMBER 2026

these are:

Home charging

7P PER MILE

Public charging

15P PER MILE.

These rates relate to company electric cars.

They should not be confused with the 55p AMAP rate for personally owned cars.

What If I Buy the EV Personally?

This has become significantly more interesting in 2026/27.

If you personally own the vehicle and use it for qualifying business journeys, your company can pay Approved Mileage Allowance Payments of:

First 10,000 business miles

55P PER MILE

Thereafter

25P PER MILE.

The increase from 45p to 55p was backdated to:

6 APRIL 2026.

So if you drive 10,000 qualifying business miles:

10,000 × 55p = £5,500

£5,500

can potentially be reimbursed under the AMAP rules.

That rate applies to electric cars as well as petrol, diesel and hybrid cars.

£30,000 Used EV Personally vs Company Owned

Suppose you buy a used EV personally for:

£30,000

and drive:

10,000 QUALIFYING BUSINESS MILES.

Your company could potentially reimburse:

£5,500

under the AMAP rules.

There is no company-car BIK because:

IT IS YOUR CAR.

But you personally had to fund the £30,000 purchase.

If the company buys it instead:

the company provides the £30,000;
it owns the vehicle;
it potentially obtains capital allowances;
it can pay relevant running costs;

but private availability will normally create a company-car BIK.

Neither answer is automatically better.

Don’t Confuse the EV Mileage Rates

There are now some very different numbers being quoted for electric cars:

Situation	2026/27 rate
Personally owned car – first 10,000 qualifying business miles	55p/mile
Personally owned car – thereafter	25p/mile
Company EV – home charging advisory rate from 1 Sept 2026	7p/mile
Company EV – public charging advisory rate from 1 Sept 2026	15p/mile

These rates do completely different jobs.

55P DOES NOT APPLY TO A COMPANY CAR.

What About Vehicle Excise Duty?

Electric cars are no longer generally exempt from Vehicle Excise Duty.

There is also the Expensive Car Supplement to consider.

From 1 April 2026, the Expensive Car Supplement threshold for zero-emission cars increased from:

£40,000

to:

MORE THAN £50,000.

So an EV’s list price can affect:

company-car BIK; and
potentially VED.

That’s another reason to look beyond the discounted price you actually pay.

What About Salary Sacrifice?

EVs can also remain particularly attractive through properly structured salary-sacrifice arrangements because low-emission cars benefit from special treatment under the Optional Remuneration Arrangement rules.

But salary sacrifice introduces additional considerations including:

National Minimum Wage;
pensionable pay;
statutory payments;
early termination charges;
maternity and other leave;
employees leaving;
insurance;
damage;
and excess mileage.

For an owner-managed limited company, straightforward company ownership may often be easier to compare first.

So Which Option Is Best?

A NEW COMPANY EV MAY BE BEST IF:

your company has sufficient taxable profits;
the car qualifies for the 100% FYA;
immediate Corporation Tax relief is valuable;
an eligible vehicle qualifies for the Electric Car Grant;
you value a full manufacturer/battery warranty;
you want the latest battery and charging technology;
you expect to keep the car for a reasonable period.

A SECOND-HAND COMPANY EV MAY BE BEST IF:

somebody else has already absorbed substantial depreciation;
the purchase price is significantly lower;
preserving company cash is important;
immediate capital allowance relief is less important;
the battery condition and warranty are good;
you are comfortable with the original list price used for BIK.

PERSONAL OWNERSHIP MAY BE BEST IF:

you can buy a relatively inexpensive used EV personally;
you drive significant business mileage;
the 55p AMAP rate is valuable;
you want to avoid company-car BIK;
you prefer personal ownership and flexibility.

The Comparison I Would Make Before Buying

For an owner-managed limited company, don’t just ask:

“Should the company buy an electric car?”

Compare:

OPTION 1

NEW EV BOUGHT BY THE COMPANY

Potential 100% FYA
Low 4% BIK
Potential grant on qualifying lower-priced models
Potentially highest depreciation

OPTION 2

SECOND-HAND EV BOUGHT BY THE COMPANY

Much lower purchase price possible
14% main-rate capital allowances
Same 4% BIK percentage
BIK still based broadly on original list price

OPTION 3

EV BOUGHT PERSONALLY

No company capital allowances
No company-car BIK
Company can potentially pay 55p/mile for first 10,000 qualifying business miles
You personally fund the vehicle

10 Questions to Ask Before You Order an EV

Is it genuinely new and unused?
Does it qualify for the 100% EV FYA?
Does the particular new model qualify for the Electric Car Grant?
What was the original list price for BIK?
How much has an equivalent used EV already depreciated?
What is the expected resale value in three or four years?
How many business miles will I actually drive?
Should I buy it personally and claim 55p mileage instead?
Should the company buy, HP, PCP or lease it?
Where will I charge it and what are the VAT and reimbursement consequences?

Answer those questions before choosing the car.

Frequently Asked Questions

Does a new electric car get 100% tax relief?

A qualifying new and unused zero-emission car can currently qualify for 100% First-Year Allowances. For Corporation Tax purposes, the current relief runs to 31 March 2027.

Does a second-hand electric car get 100% capital allowances?

No. A second-hand zero-emission car will generally receive main-rate writing-down allowances instead.

What is the capital allowance rate for a used EV in 2026?

The main WDA rate reduced to 14% from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. Hybrid rates can apply to accounting periods spanning the change.

Can I claim AIA on an electric car?

No. Cars are excluded from AIA.

Can I claim Full Expensing on an electric car?

No.

Does the general 40% FYA apply to cars?

No.

The 100% relief for qualifying new EVs comes from the specific zero-emission car FYA.

What is the EV BIK rate for 2026/27?

4%.

Is BIK lower if I buy the EV second-hand?

Not simply because it is second-hand. The calculation is broadly based on the relevant original list price rather than the second-hand price paid.

Can my company reclaim VAT when it buys an electric car?

Usually not where the car is available for private use. EVs don’t receive a special exemption from the normal VAT rules for cars.

Does the VAT fuel scale charge apply to electricity?

Don’t automatically apply the conventional road-fuel scale charge to an EV. HMRC deals with EV charging electricity separately in its VAT guidance, and business/private use and the identity of the recipient of the electricity supply need to be considered.

Can my company recover VAT on home charging?

Under HMRC’s currently published position, where an employee charges an EV at home, the electricity is supplied to the employee rather than the employer, so the employer cannot recover that VAT.

Are EV grants still available?

Yes. Eligible new cars can currently qualify for the Electric Car Grant, with maximum discounts of £3,750 or £1,500, depending on the vehicle’s grant band.

Are charger grants still available?

Yes. The Workplace Charging Scheme currently offers up to 75% of eligible costs, capped at £500 per socket for up to 40 sockets, subject to eligibility.

Can my company pay 55p per mile if I own an EV personally?

Yes, for the first 10,000 qualifying business miles in 2026/27 under the AMAP rules. The rate then falls to 25p.

New Doesn’t Automatically Mean Better

There is a very compelling tax case for a qualifying new company EV:

100% FIRST-YEAR ALLOWANCE

4% BIK

POTENTIAL EV GRANT

POTENTIAL CHARGEPOINT SUPPORT.

But:

TAX RELIEF DOESN’T MAKE DEPRECIATION DISAPPEAR.

A two or three-year-old EV might cost £15,000 or £20,000 less than its new equivalent.

And personal ownership has become more competitive because the first 10,000 qualifying business miles can now potentially be reimbursed at:

55P PER MILE.

So the right question isn’t:

“Which option gives me the biggest tax deduction?”

It is:

“WHICH OPTION GIVES ME THE LOWEST WHOLE-LIFE AFTER-TAX COST?”

Bicknell Business Advisers

For owner-managed limited companies, electric cars remain one of the most tax-efficient company-car options available in 2026/27.

But new, second-hand and personally owned EVs can produce very different results.

Before ordering a car, we can compare:

new vs second-hand;
company vs personal ownership;
cash vs HP vs PCP vs lease;
Corporation Tax;
capital allowances;
Benefit in Kind;
Class 1A NIC;
VAT;
grants;
charging;
business mileage;
and expected disposal value.

When you’re spending £30,000, £40,000 or £50,000 on a vehicle, doing the calculation before you buy it can be considerably more useful than working out the tax consequences afterwards.

More Company Car & Vehicle Tax Guides

Buy, HP, PCP or Lease a £50,000 Car Through Your Business?

Compare cash purchase, finance, PCP, leasing and personal ownership.

Hire Purchase, PCP & Leasing – Capital Allowances & Tax

How the method of finance changes the tax and accounting treatment.

Is It a Van or a Car for Tax?

Double-cab pickups, crew vans, Benefit in Kind, capital allowances and VAT explained.

About the Author

Buy, HP, PCP or Lease a £50,000 Car Through Your Business?

Buying a £50,000 business car? Compare cash, HP, PCP, leasing and personal ownership, including EV tax relief, VAT, BIK, salary sacrifice and 2026 mileage rates.

Limited Company vs Self-Employed – Tax, VAT, Benefit in Kind & Capital Allowances Explained for 2026/27

By Steve Bicknell FCMA, CGMA

Business owners ask us about cars all the time.

You have found the car you want.

It costs:

£50,000

Now comes the difficult question:

WHAT IS THE MOST TAX-EFFICIENT WAY TO GET IT?

Should your limited company:

buy it outright?
use Hire Purchase?
take a PCP?
lease it?
buy a new electric car?
buy a second-hand electric car?

Or would you actually be better buying the car personally and claiming business mileage?

The answer isn’t simply:

“Put the car through the company and claim the tax.”

How the vehicle is financed, its CO₂ emissions, whether it is new or second-hand, how much private use there is, and whether you operate through a limited company or are self-employed can completely change the answer.

And the 2026/27 rules contain some important changes.

Company Cars Are Making a Comeback – And Half Are Electric

Company cars certainly haven’t disappeared.

HMRC’s latest official statistics estimate that 920,000 people received company-car benefit in 2024/25, up from 840,000 in the previous year.

That represents an increase of:

80,000 COMPANY-CAR RECIPIENTS IN ONE YEAR

But the type of company car has changed dramatically.

In 2024/25:

51% of reported company cars were fully electric
around 467,000 company-car recipients had zero-emission cars
693,000 company cars had emissions of 74g/km or less
diesel cars represented only 7% of company cars
average reported company-car emissions had fallen to 41g/km

HMRC’s figures are provisional for 2024/25, but the direction is striking.

That helps explain why the question:

“SHOULD MY COMPANY BUY ME AN ELECTRIC CAR?”

has become so common.

But before deciding which car to buy, we should first determine who should own it and how it should be financed.

£50,000 Car – Quick Answer

There is no single winner.

But some useful starting points are:

NEW ELECTRIC CAR

Potentially very attractive through a limited company because a qualifying new and unused zero-emission car can currently obtain a 100% first-year capital allowance.

The 2026/27 company-car Benefit in Kind percentage is also only:

4%

SECOND-HAND ELECTRIC CAR

Still benefits from the low electric-car BIK percentage, but it doesn’t receive the same 100% first-year capital allowance.

It instead falls into the main-rate capital allowance regime.

PETROL OR DIESEL CAR

Can be considerably less attractive through a company if there is private availability, because company-car BIK percentages can reach:

37%

in 2026/27.

HP

Normally represents acquisition of the car using finance.

The repayments themselves aren’t simply deducted as a monthly business expense: capital allowances and finance costs need to be considered separately.

PCP

The precise tax treatment depends on the actual agreement.

Don’t decide the accounting or tax treatment simply because the paperwork says PCP.

LEASE

The business normally obtains tax relief for lease rentals rather than claiming capital allowances on the car.

VAT treatment can also be more favourable than outright purchase.

PERSONAL OWNERSHIP + MILEAGE

This has become more attractive since 6 April 2026, because the approved rate for the first 10,000 qualifying business miles increased to:

55p PER MILE

The First Decision Isn’t HP or PCP

Before deciding how to finance the vehicle, ask:

WHO SHOULD OWN THE CAR?

There are really two decisions.

Decision 1

Business/company car or personally owned car?

Then:

Decision 2

Cash, HP, PCP or lease?

Those decisions are often approached in the wrong order.

Our £50,000 Example

We’ll compare:

OPTION 1

Business buys for cash

OPTION 2

Hire Purchase

OPTION 3

PCP

OPTION 4

Lease / contract hire

OPTION 5

Personal ownership + business mileage

But there is another factor capable of completely changing the result:

WHAT TYPE OF CAR IS IT?

So we also need to compare:

£50,000 NEW ELECTRIC CAR

£50,000 SECOND-HAND ELECTRIC CAR

£50,000 PETROL/DIESEL CAR

New Electric Car – 100% Capital Allowance

For qualifying new and unused zero-emission cars, the business can currently claim:

100% FIRST-YEAR ALLOWANCE

HMRC’s current business-car rules distinguish these cars from other vehicles.

So if Consultancy 4 Business Ltd buys a qualifying new EV for:

£50,000

potential qualifying first-year allowance:

£50,000

If the company is paying Corporation Tax at 25%, a simplified illustration gives:

£50,000 × 25%

£12,500 CORPORATION TAX SAVING

subject to sufficient taxable profits and the company’s circumstances.

That is a very powerful tax incentive.

Second-Hand EV – Very Different Capital Allowances

Now change just one thing.

The £50,000 electric car is second-hand.

It does not receive the special 100% first-year allowance available to a qualifying new EV.

Instead it falls into the main-rate capital allowance regime. HMRC’s current main-pool WDA is:

14%

from April 2026.

So a simple first-year illustration would be:

£50,000 × 14%

£7,000 CAPITAL ALLOWANCE

Compare:

New qualifying EV

£50,000

Second-hand EV

£7,000 first-year WDA

That is a major difference in the timing of tax relief.

It doesn’t necessarily make the second-hand EV commercially worse — depreciation and purchase price still matter — but:

ELECTRIC DOESN’T AUTOMATICALLY MEAN 100% TAX RELIEF

Higher-Emission Car

A higher-emission vehicle may fall into the special-rate pool.

The current special-rate WDA remains:

6%

So on £50,000:

£50,000 × 6%

£3,000

of first-year WDA in a straightforward illustration.

The capital allowance contrast can therefore be enormous.

£50,000 Car	Illustrative First-Year Capital Allowance
Qualifying new zero-emission car	£50,000
Second-hand electric / qualifying main-rate car	£7,000
Higher-emission special-rate car	£3,000

The actual result depends on the specific vehicle and period, but this demonstrates why the emissions and whether the car is new matter so much.

Capital Allowances Are Only Half the Story

A company might get excellent tax relief on acquiring the car.

But if it is available to the director for private use, the director can simultaneously have a:

COMPANY-CAR BENEFIT IN KIND

And private use includes ordinary commuting.

So we need to compare:

COMPANY TAX SAVING

against:

PERSONAL TAX COST

£50,000 Electric Company Car – 2026/27 BIK

For a zero-emission company car, the 2026/27 appropriate percentage is:

4%

Assume the relevant list price is £50,000.

£50,000 × 4%

£2,000 TAXABLE BENEFIT

Illustrative personal tax:

Tax rate	Annual Income Tax
20%	£400
40%	£800
45%	£900

The employer also has Class 1A NIC to consider.

That’s one reason electric company cars remain attractive.

EV Company-Car Tax Will Rise

The percentage doesn’t stay at 4%.

For zero-emission company cars:

2026/27

2027/28

The government’s published policy continues increasing the electric-car percentages thereafter.

So if you’re considering a three- or four-year finance agreement:

Don’t calculate the whole deal using today’s BIK percentage.

Compare a £50,000 Petrol Car

A sufficiently high-emission car can attract the maximum 2026/27 percentage of:

37%

£50,000 × 37%

£18,500 TAXABLE BENEFIT

For a 40% taxpayer:

£18,500 × 40%

£7,400 INCOME TAX PER YEAR

Compare that with the £800 illustrative tax on our £50,000 EV.

Same £50,000 list price.

Very different personal tax cost.

Option 1 – Buy the Car for Cash

The business pays:

£50,000

and acquires the vehicle.

Potential advantages:

no finance interest;
no monthly finance commitment;
business owns the vehicle;
potential capital allowances;
potentially 100% FYA for a qualifying new EV.

Potential disadvantages:

major immediate cash outflow;
company bears depreciation risk;
VAT on an ordinary car purchase is usually difficult to recover;
company-car BIK arises if available privately.

Can the Business Reclaim VAT When Buying a Car?

This is often misunderstood.

For an ordinary business car which is available for private use:

INPUT VAT ON PURCHASE IS NORMALLY BLOCKED

Full recovery typically requires the circumstances to meet one of the specific exceptions, including genuinely excluding private availability.

The test isn’t merely:

“I hardly use it privately.”

There needs to be a strong basis for saying that it is not available for private use.

Option 2 – Hire Purchase

Under a typical HP arrangement:

Deposit

↓

Monthly payments

↓

Ownership passes / is acquired under the agreement

For tax purposes, don’t simply put the whole HP repayment through as:

Motor expense

The capital part relates to the acquisition of the vehicle.

The relevant capital allowance treatment therefore needs considering.

The finance/interest element is treated separately.

For a qualifying new zero-emission vehicle, the capital allowance position can make HP particularly interesting because the tax relief may arise much more quickly than the corresponding cash payments.

Option 3 – PCP

PCP is popular because it can reduce the monthly payment.

Typically:

Deposit

↓

Monthly payments

↓

Large final / balloon payment

Then the customer can often:

pay the balloon and keep the vehicle;
hand it back;
or use any equity towards another car.

But:

PCP DOESN’T AUTOMATICALLY MEAN LEASE

The actual contractual terms matter.

Questions include:

Is ownership expected to transfer?
How significant is the purchase option?
Who carries residual-value risk?
Is this effectively financing an acquisition?
Or is it fundamentally a hire arrangement?

So I would always suggest giving the actual PCP agreement to your accountant rather than simply saying:

“It’s on PCP.”

Option 4 – Lease / Contract Hire

Suppose instead the business leases the vehicle.

For example:

Initial rental

£4,500

Monthly rental

£750 + VAT

Term

36 months

End

Car returned to leasing company.

The business isn’t normally claiming ordinary capital allowances on the car because it doesn’t own it.

Instead, it claims the relevant lease-rental expense.

For higher-emission leased cars, a tax restriction can apply to part of the rental cost.

Leasing Has an Important VAT Advantage

Buying and leasing can produce very different VAT outcomes.

Where a car is leased and used partly privately, the standard restriction generally blocks:

50% OF THE VAT ON THE LEASE RENTALS

meaning the remaining VAT may potentially be recovered subject to the normal rules.

That is often considerably better than buying an ordinary company car where purchase VAT is completely blocked.

So if the lease is:

£750 + £150 VAT

potentially:

£75

of the VAT may be recoverable under the normal 50% car-leasing restriction, assuming full business VAT recovery otherwise.

Don’t Treat Maintenance the Same as the Car Rental

If a lease invoice separately identifies:

maintenance;
servicing;
other charges,

those items can have different VAT consequences.

So don’t simply apply:

50% VAT RECOVERY

to everything on the invoice without checking what it relates to.

£50,000 Car – Buy vs HP vs PCP vs Lease

Issue	Cash	HP	PCP	Lease
Large upfront cash cost	High	Lower	Lower	Lower
Business ownership	Yes	Usually acquisition route	Depends on agreement	Usually no
Capital allowances	Yes	Potentially yes	Depends on substance	Usually not claimed by lessee
New EV 100% FYA	Potentially	Potentially	Depends on arrangement	Rental deduction instead
Finance cost	None	Yes	Yes	Included in rent
Purchase VAT with private use	Usually blocked	Usually blocked	Depends on structure	N/A as purchase
Lease VAT recovery	N/A	N/A	Depends	Normally 50% block
Company-car BIK	Yes	Yes	Yes	Yes
Residual-value risk	Business	Business	Contract dependent	Lessor
Own vehicle at end	Yes	Usually	Optional	No

The key point is:

FINANCE METHOD DOESN’T ELIMINATE BIK

If the company provides the car and it is available privately, changing the funding method generally doesn’t remove the company-car benefit.

Option 5 – Buy Personally and Claim Mileage

Sometimes the most tax-efficient company car is:

NO COMPANY CAR AT ALL

The director buys the vehicle personally.

Then the company reimburses qualifying business mileage.

For 2026/27 HMRC’s approved mileage rate for cars and vans is:

First 10,000 business miles

55p PER MILE

Over 10,000

25p PER MILE

At 10,000 business miles:

10,000 × 55p

£5,500

potentially reimbursable under the approved mileage regime.

And because it isn’t a company car:

NO COMPANY-CAR BIK

Limited Company vs Self-Employed

The position differs for a sole trader.

Issue	Limited Company	Self-Employed
Separate company owns car	Yes	No separate legal owner
Company-car BIK	Potentially yes	No BIK on proprietor
Private use	BIK consequence	Restricts business claim
Capital allowances	Company claims	Trader claims with private-use restriction
Personally owned mileage route	AMAP reimbursement	Simplified mileage may be available
First 10,000 miles 2026/27	55p	55p
VAT	Depends on use/transaction	Same broad VAT principles

A sole trader may therefore compare:

Actual vehicle costs + capital allowances

against:

Simplified mileage

subject to the relevant rules.

Again:

LIMITED COMPANY ≠ SELF-EMPLOYED

Salary Sacrifice – Does It Still Work for Cars?

Yes — but the rules are particularly favourable for low-emission cars.

Normally, the Optional Remuneration Arrangement rules can tax a benefit based on the higher of:

salary sacrificed; or
normal BIK value.

However, HMRC specifically excludes cars with CO₂ emissions of:

75g/km OR LESS

from those normal OpRA comparison rules.

They continue to be taxed under the normal company-car benefit calculation.

That means salary sacrifice can remain particularly attractive for electric cars.

For example:

Employee sacrifices

£600 monthly salary

in exchange for:

Electric company car

The taxable benefit can still be based on the normal EV company-car rules rather than simply taxing the £7,200 salary foregone.

But salary sacrifice must be a genuine contractual arrangement.

It needs to be put in place before the salary is earned, and employers need to consider:

National Minimum Wage;
pensionable pay;
statutory pay;
employment contracts;
employee leaving;
early termination;
insurance;
excess mileage.

It isn’t simply:

“We bought a car, so let’s retrospectively call it salary sacrifice.”

Personally Borrowing Money to Fund the Company Car?

This is another area where directors can accidentally blur the company/personal boundary.

Suppose the bank will only lend personally to the director.

The director borrows:

£50,000

personally and then puts the money into the company.

Don’t simply record the bank loan as:

Company car finance

The borrower is the individual.

The company and director are separate legal persons.

Usually, the accounting needs to reflect that the director has lent money to the company.

Could the Director Claim Tax Relief on Their Personal Interest?

Potentially.

Income Tax relief can be available where an individual borrows money and lends it to a qualifying close company for use wholly and exclusively in its business, subject to detailed eligibility conditions including the individual’s shareholding/working relationship and capital-recovery rules.

So before assuming the personal interest cost is simply lost:

CHECK QUALIFYING LOAN INTEREST RELIEF

Or Could the Company Pay the Director Interest?

Potentially.

If the director lends money to the company and charges it interest:

the interest can be a business expense for the company, subject to the usual rules;
it is personal taxable income for the director;
the company normally pays the interest net of 20% Income Tax;
and accounts for that tax quarterly using Form CT61.

This does not mean charging interest is always preferable to claiming personal qualifying-loan interest relief.

They are different structures.

The point is:

Decide what the financing arrangement actually is before putting the car through the accounts.

Private Fuel – Another Tax Charge

Company car and company fuel are separate benefits.

If the employer pays for private petrol or diesel and the employee does not fully reimburse it, a separate fuel benefit can arise.

This can be surprisingly expensive.

So:

“The company already owns the car, so it might as well pay for all my fuel.”

can be a costly assumption.

Always calculate the separate fuel-benefit position.

VAT on Fuel – Road Fuel Scale Charges

There is then a completely separate VAT issue.

Suppose a VAT-registered business pays for fuel, recovers input VAT, but the vehicle is also used privately.

One method of accounting for the private element is HMRC’s:

VAT ROAD FUEL SCALE CHARGE

The scale charge is determined by the vehicle’s CO₂ emissions and the VAT accounting period.

HMRC’s current scale applies from:

1 MAY 2026 TO 30 APRIL 2027

Examples for a 12-month VAT accounting period include:

CO₂ emissions	VAT-inclusive annual scale charge	VAT due
120g/km or less	£657	£109.50
150g/km	£1,314	£219.00
175g/km	£1,640	£273.33
200g/km	£1,971	£328.50
225g/km or more	£2,297	£382.83

The important thing is not to confuse:

Company-car fuel Benefit in Kind

with:

VAT road fuel scale charges

They are different tax regimes.

Pool Cars and “No Private Use”

A genuine pool car can avoid normal company-car BIK where all the statutory conditions are met.

But:

CALLING IT A POOL CAR DOESN’T MAKE IT ONE

Similarly, writing:

“No private use permitted.”

in a company policy is useful, but the actual behaviour must support it.

If the car is routinely:

taken home;
allocated to one director;
used at weekends;
available to family members,

the facts may undermine the label.

We will update our separate detailed guides to pool cars and no-private-use policies shortly.

Is It Actually a Car or a Van?

This question comes before much of the above.

HMRC’s tax treatment of cars and vans can differ materially.

This is particularly important for:

double-cab pickups;
crew vans;
combi vehicles;
vehicles with second rows of seats.

Don’t assume:

“The dealer calls it a commercial vehicle.”

means HMRC will necessarily treat it as a van for every tax.

That will be the subject of our next updated vehicle guide.

15 Questions to Answer Before Signing

Before buying or financing the vehicle, establish:

Is it a car or a van for tax?
Who should own it — company or individual?
New or second-hand?
Electric, hybrid, petrol or diesel?
CO₂ emissions?
Electric range if hybrid?
Relevant list price?
Actual purchase price?
Cash, HP, PCP or lease?
Is the business VAT registered?
How much business mileage?
How much private use?
What is the director’s marginal tax rate?
What is the company’s tax position?
What happens at the end of the agreement?

Only then can you properly answer:

WHICH OPTION IS BEST?

£50,000 Car – Broad Conclusions

NEW EV THROUGH LIMITED COMPANY

Often deserves serious consideration because of:

potentially 100% first-year capital allowance;
4% BIK for 2026/27;
business funding;
potentially attractive salary-sacrifice treatment.

SECOND-HAND EV

Still potentially attractive for BIK, but significantly slower capital allowances.

HIGH-EMISSION COMPANY CAR

Can become very expensive because of personal BIK.

HP

Potentially good where you want ownership but want to preserve cash flow.

PCP

Potentially attractive commercially, but the agreement needs reading before deciding its tax/accounting character.

LEASE

Can provide:

predictable cash costs;
no residual-value risk;
possible VAT recovery on rentals;
potentially deductible rentals.

PERSONAL OWNERSHIP

Should always be modelled, especially now that:

10,000 BUSINESS MILES = £5,500

under the 2026/27 approved mileage rate.

12 Common Car Tax Mistakes

Assuming every EV gets 100% first-year allowances.
Forgetting the difference between new and second-hand EVs.
Using purchase price instead of list price for BIK.
Treating all HP repayments as expenses.
Assuming all PCP agreements have identical tax treatment.
Assuming company payment means VAT is reclaimable.
Forgetting the normal 50% VAT block on leased-car rentals.
Ignoring company-car BIK because the car is “mainly business”.
Calling a director’s vehicle a pool car without meeting the conditions.
Forgetting the separate private-fuel benefit and VAT fuel rules.
Treating the director’s personal bank loan as though the company borrowed it.
Failing to compare everything with personal ownership + mileage.

Frequently Asked Questions

Can my company buy me a £50,000 car?

Yes, but whether it is tax-efficient depends on the car, finance, emissions and private use.

Does a new electric car get 100% tax relief?

A qualifying new and unused zero-emission car can currently qualify for a 100% first-year capital allowance.

What about a second-hand electric car?

It does not normally get that same 100% EV first-year allowance and instead falls into the main-rate capital allowance rules.

What is the EV company-car rate in 2026/27?

4%.

Can I claim VAT on a company car?

Usually not on a purchased car available for private use. Specific exceptions exist.

Can I claim VAT on a lease?

Where the standard car-leasing restriction applies, 50% of the VAT on the leasing charge is normally blocked.

Can PCP be claimed as a monthly expense?

Not automatically. The precise terms of the agreement need to be reviewed.

Can my company pay me mileage instead?

Yes, where you own the vehicle personally and make qualifying business journeys. The first 10,000 business miles are now 55p per mile for 2026/27.

Does electric-car salary sacrifice still work?

Yes. Cars emitting no more than 75g/km are excluded from the normal OpRA salary-foregone comparison and remain taxed under the normal company-car benefit rules.

What if I borrow personally and lend the money to my company?

Treat the personal loan and director-to-company loan as separate transactions. Qualifying loan interest relief and/or company-paid interest may need consideration depending on the circumstances.

Bicknell Business Advisers’ Car Decision

Before signing anything:

CAR OR VAN?

↓

COMPANY OR PERSONAL?

↓

NEW OR SECOND-HAND?

↓

EV / HYBRID / PETROL / DIESEL?

↓

CASH / HP / PCP / LEASE?

↓

CAPITAL ALLOWANCES OR RENTALS?

↓

VAT?

↓

PRIVATE USE + BIK?

↓

FUEL?

↓

55p MILEAGE ALTERNATIVE?

↓

END-OF-AGREEMENT POSITION?

Then:

BUY THE CAR

Bicknell Business Advisers’ Advice

The worst time to ask:

“What’s the best tax treatment?”

is after the car has already been bought.

The better approach is to send us:

vehicle quote;
list price;
CO₂ figure;
finance quotation;
PCP/HP agreement;
lease quote;
expected mileage;
estimated private use.

Then compare the options before signing.

For a £50,000 car, the tax difference between:

new EV,

second-hand EV,

high-emission company car,

lease,

and:

personally owned vehicle + mileage

can run into thousands of pounds.

How We Can Help

At Bicknell Business Advisers, we help company directors, business owners and the self-employed compare vehicle options before committing to the purchase.

We can review:

company vs personal ownership;
cash purchase;
Hire Purchase;
PCP;
leasing;
new vs second-hand EV;
petrol/diesel/hybrid;
Corporation Tax;
Income Tax;
capital allowances;
VAT;
Benefit in Kind;
salary sacrifice;
qualifying loan interest;
CT61 interest;
business mileage;
fuel; and
disposal/return of the vehicle.

For a substantial vehicle purchase, doing the calculation before signing the finance agreement can make a very significant difference.

About the Author

Should Your Limited Company Pay You Rent for a Home Office?

Tax, VAT, Planning, Capital Allowances and FRS 102 Explained

By Steve Bicknell FCMA, CGMA

If you run your limited company from home, you may already know about the familiar:

£6 per week / £312 per year

Homeworking reimbursement.

It is simple, potentially tax-free and involves very little administration.

But what if your company makes much greater use of your home?

Could you charge your company a commercial rent for using part of the property as an office?

Potentially, yes.

And the opportunity can go considerably further than simply replacing £312 with a larger payment.

Your company might also:

buy computers and office equipment;
claim capital allowances;
recover VAT where appropriate; and
obtain Corporation Tax relief on qualifying expenditure.

But creating a more formal home-office arrangement also introduces other questions:

Is the rent taxable personally?
What household costs can you claim?
Could it affect Private Residence Relief when you sell your home?
Does your mortgage lender need to agree?
Could business rates apply?
Do you need planning permission?
Would a Certificate of Lawfulness be useful?
What about insurance?
And, under the revised FRS 102 rules, does the home-office agreement need to appear on your company’s balance sheet as a lease?

That last point is particularly interesting because relatively few discussions of directors charging their companies home-office rent consider the new FRS 102 lease accounting rules.

The right question therefore isn’t simply:

“How much rent can I get out of my company?”

It is:

“What is the most tax-efficient and commercially sensible way for my company to use my home?”

Home Office Rent – Quick Answer

Yes. A director can potentially charge their limited company commercial rent for genuine business use of part of their home.

The company may obtain a Corporation Tax deduction.

The director normally reports the rent as property income and deducts allowable expenses when calculating the taxable profit.

But the arrangement can also affect:

VAT + CAPITAL ALLOWANCES + CGT + PLANNING + BUSINESS RATES + FRS 102

So it needs to be considered as a complete arrangement rather than simply another method of extracting cash.

£312 or Home-Office Rent?

Here’s the basic comparison:

	£312 Homeworking Reimbursement	Home-Office Rent
Potential amount	£312 p.a.	Potentially much higher
Tax on director	Potentially tax-free	Taxable property income
Corporation Tax deduction	Yes	Potentially yes
Household costs against rent	N/A	Potentially yes
Rental agreement	No	Advisable
Property income reporting	No	Potentially yes
CGT/PRR considerations	Minimal	Needs consideration
Planning/property issues	Usually limited	Potentially greater
FRS 102 lease issue	No	Potentially yes
Administration	Very low	Higher

For many directors, £312 wins on simplicity.

But where the company genuinely occupies valuable workspace within the home, a commercial rental arrangement may produce a significantly better overall result.

Who Should Consider Charging Their Company Rent?

This is most worth considering where:

you work predominantly from home;
your company genuinely uses a dedicated room or substantial workspace;
meaningful household costs relate to that use;
business equipment or records are stored there;
the company buys substantial office equipment; or
£312 bears little relationship to the actual commercial value of the facilities being provided.

If you occasionally answer emails from the kitchen table, a formal rental arrangement may be unnecessary.

Option 1 – Keep It Simple: £312 a Year

Where the relevant conditions are satisfied, the company can reimburse qualifying additional homeworking expenses.

HMRC’s guideline rate is:

£6 per week

or:

£26 per month

giving:

£312 per year

For many owner-managed companies this remains attractive:

Company: potential Corporation Tax deduction

Director: potentially £312 tax-free

Administration: minimal

And importantly:

No rent + no property income + no rental agreement

We’ve previously looked at this in:

HMRC Update: New Evidence Rules for £312 Working From Home Allowance

That article has been one of our most popular recent working-from-home tax guides.

But £312 is still only £312.

What if your company genuinely uses substantially more of your home?

Option 2 – Charge Your Company Commercial Rent

Suppose your company regularly uses one room within your house as its office.

You could potentially put an agreement in place allowing the company to use that space and pay you rent.

The rent should reflect:

GENUINE BUSINESS USE + A REASONABLE COMMERCIAL AMOUNT

The basic mechanics become:

YOUR COMPANY

Pays rent

↓

Potential Corporation Tax deduction

YOU

Receive property income

↓

Deduct qualifying expenses

↓

Pay Income Tax on the resulting property profit

This is fundamentally different from the £312 reimbursement.

Worked Example – £312 or £4,800 Rent?

Let’s use our fictional example:

Consultancy 4 Business Ltd

The director works predominantly from home and one room is regularly used for the company’s business.

After considering comparable local office space and the facilities being provided, a reasonable commercial rent is established at:

£400 per month

Annual rent:

£4,800

Suppose allowable household expenditure reasonably attributable to the arrangement amounts to:

£1,800

The personal property-income calculation is:

	Amount
Rent received	£4,800
Allowable expenses	(£1,800)
Property profit	£3,000

Now assume, purely for illustration, that Consultancy 4 Business Ltd obtains Corporation Tax relief at 25%.

Company tax saving:

£4,800 × 25% = £1,200

If the £3,000 property profit is taxed at the new 22% property basic rate from April 2027:

£3,000 × 22% = £660

Simplified tax difference:

£1,200 company tax saving

less

£660 personal tax

£540

before taking account of the wider circumstances.

This is deliberately simplified.

The actual result could be affected by:

the company’s Corporation Tax rate;
your other income;
property tax bands;
mortgage finance costs;
jointly owned property;
allowances;
dividends; and
your wider profit-extraction strategy.

But it demonstrates why this can be worth calculating.

Property Income Tax Changes From April 2027

There is another reason the numbers need modelling carefully.

From 6 April 2027, property income will have separate Income Tax rates of:

22%
42%
47%

in England, Wales and Northern Ireland.

So the relevant comparison isn’t simply:

£312 versus £4,800

It is:

COMPANY TAX SAVING versus PERSONAL PROPERTY TAX

How Much Rent Can You Charge?

Not:

“Whatever amount saves the most tax.”

The rent needs to be commercially supportable.

Relevant factors can include:

size of the workspace;
floor area;
facilities;
storage;
parking;
hours and days of use;
utilities provided;
broadband;
local office rents;
serviced-office alternatives; and
restrictions placed on you as homeowner.

Keep evidence.

That might include:

floor plan + local rental comparables + bills + calculation + written agreement

The target is:

REASONABLE + COMMERCIAL + EVIDENCED

How Do You Determine a Market Rent for a Home Office?

There is no HMRC table telling directors that a bedroom used as an office is worth £200, £300 or £500 per month.

The rent should instead be a reasonable commercial figure based on the space and facilities actually being provided to the company.

A sensible approach is to start by looking at comparable workspace in your area, such as:

small serviced offices;
individual office rooms;
coworking/private-office space;
small commercial units; and
similar workspace advertised locally.

Then adjust for the fact that a room within your home is not necessarily equivalent to a fully serviced commercial office.

Consider factors such as:

floor area;
location;
dedicated storage;
parking;
broadband and utilities;
access arrangements;
days and hours available to the company;
whether clients or staff can attend;
kitchen/toilet facilities; and
whether the room retains genuine domestic use.

For example, suppose comparable local office space costs £500 per month, but your company is only obtaining use of a room within your home, without independent access, reception facilities or exclusive 24-hour occupation.

A reasonable home-office rent might therefore be materially less than £500.

The important thing is to retain evidence showing how you arrived at the figure.

I would keep:

1. Local comparable rents

Screenshots or copies of local office and serviced-office advertisements.

2. Floor-area calculation

For example, the office represents 12% of the usable floor area of the house.

3. Facilities provided

Broadband, heating, electricity, furniture, parking and storage.

4. Restrictions on use

For example, no independent entrance, no client meetings or continuing domestic use.

5. A written calculation

Keep a short note with the rental agreement explaining why the agreed rent is commercially reasonable.

The aim is not to produce a formal RICS valuation for every spare bedroom.

It is to be able to demonstrate that the rent was arrived at commercially rather than simply being chosen to maximise a tax deduction.

Bicknell Business Advisers’ Tip: Review the rent periodically. A figure that was commercially reasonable when an agreement began may not remain appropriate indefinitely.

What Household Costs Can Be Considered?

Depending upon the circumstances, potentially relevant expenditure could include an appropriate share of:

electricity;
heating;
water;
council tax;
insurance;
broadband;
repairs;
cleaning; and
other appropriate household costs.

The method of apportionment needs to be reasonable.

You might consider:

ROOMS × FLOOR AREA × TIME USED

depending upon the circumstances.

Where a room has mixed use, both the business and private use need to be reflected.

Rent-a-Room Relief Doesn’t Normally Solve It

This is a common misconception.

The £7,500 Rent-a-Room Scheme relates to residential accommodation.

It doesn’t simply make business office rent paid by your company tax-free.

So:

“I’ll charge the company £7,500 and claim Rent-a-Room Relief.”

is generally not the answer for home-office accommodation.

Let the Company Equip the Office

This is an important additional opportunity.

Your company might require:

computers;
monitors;
printers;
desks;
chairs;
filing cabinets;
telephone equipment;
networking equipment; and
other business equipment.

Rather than buying everything personally from after-tax income, it may make more sense for the:

COMPANY TO BUY AND OWN THE EQUIPMENT

Capital Allowances on Home-Office Equipment

Qualifying expenditure on plant and machinery can potentially attract capital allowances.

Normal office equipment might include:

Computers

Monitors

Desks

Office chairs

Printers

Networking equipment

Depending upon the circumstances, the Annual Investment Allowance may provide 100% relief for qualifying expenditure.

But distinguish between:

EQUIPPING AN OFFICE

and:

BUILDING AN OFFICE

Buying a £2,000 computer is very different from spending £30,000 constructing a building in your garden.

That’s an important enough subject for a separate article:

Can Your Limited Company Pay for a Garden Office?

We’ll look at the tax, VAT, capital allowance, benefit-in-kind, CGT and planning issues separately.

VAT Can Make Company Purchases More Attractive

Suppose Consultancy 4 Business Ltd is VAT registered.

The company buys:

Item	Net	VAT
Computer	£2,000	£400
Monitors	£1,000	£200
Desk/equipment	£1,500	£300
Total	£4,500	£900

If the purchases relate properly to the company’s taxable business activities and the usual VAT recovery conditions are satisfied:

Potential VAT recovery = £900

There may then also be tax relief through capital allowances on qualifying expenditure.

The cleanest evidence trail is usually:

COMPANY PURCHASE → COMPANY INVOICE → COMPANY ASSET → BUSINESS USE

Where there is significant private use, VAT and benefit-in-kind implications require separate consideration.

Planning – Can You Actually Run the Business From Home?

This is one of the most easily overlooked issues.

Tax relief does not give you planning permission.

A home-office arrangement could make complete sense for:

Corporation Tax;
VAT;
property income; and
accounting

but still create a separate planning issue.

The broad question is:

Does the property remain primarily a home, or has the business activity materially changed its character?

When Could Planning Permission Become Relevant?

There isn’t a simple:

one room = fine

two rooms = planning application

rule.

It depends on the facts and degree of use.

Warning signs can include:

employees attending regularly;
customers visiting;
frequent commercial deliveries;
increased traffic;
parking problems;
signage;
noise;
substantial storage;
alterations;
unusual business hours; or
a significant part of the house ceasing to function domestically.

Compare these examples.

Example 1 – Professional Working From Home

One director.

Computer-based work.

No employees.

No clients visiting.

No signage.

No significant deliveries.

The property remains overwhelmingly a home.

Example 2 – Home Becoming Business Premises

Five employees attend every weekday.

Clients visit throughout the day.

Vans regularly make deliveries.

Several rooms are permanently offices.

There is signage and increased parking.

That is much more likely to require planning consideration.

What If You’re Unsure? Certificate of Lawfulness

Where you believe the proposed home-business use does not require express planning permission, but you want greater certainty, you may be able to apply for a:

Certificate of Lawfulness of Proposed Use or Development

often referred to as a:

Lawful Development Certificate

or:

CLOPUD

This isn’t the same as asking the council for planning permission.

Instead, you are effectively asking:

“Based on the proposed facts, would this use be lawful without a separate planning permission?”

If granted, the certificate can provide useful evidence of the planning position.

What Should the Certificate Application Explain?

A useful application may need to explain matters such as:

which part of the property will be used;
nature of the business;
number of people working there;
working hours;
whether clients visit;
deliveries;
parking;
signage;
noise;
storage;
alterations; and
whether the space remains capable of domestic use.

The important point is that the certificate relates to the facts actually described.

If you obtain confirmation based on:

One director, no staff, no customers

but the business later develops into:

Five employees and regular customer visits

you shouldn’t simply assume the original certificate covers the changed circumstances.

What About Neighbours and Planning Notices?

Lawful Development Certificates are sometimes confused with conventional planning applications.

There isn’t generally the same statutory neighbour-consultation process as for a normal planning application.

However, the planning authority can seek evidence from neighbours or other parties if it considers that information relevant to determining whether the proposed use is lawful.

So the important thing is to provide a clear and accurate description of the proposed activity.

Why Could a Certificate of Lawfulness Be Useful?

It can potentially help later when dealing with:

sale of the house;
purchaser’s solicitor;
mortgage lender;
neighbour complaint;
planning enquiry; or
possible enforcement concerns.

It may therefore be worth considering where the business use is more substantial than simply working occasionally from a spare room, but you believe it remains lawful without express planning permission.

Check Your Mortgage

Don’t forget the lender.

A residential mortgage could contain restrictions concerning:

business use;
commercial occupation;
leases or licences;
subletting;
alterations; or
granting rights over part of the property.

This becomes particularly relevant once you propose signing an agreement granting your company rights over the home.

Tax efficiency doesn’t override your mortgage conditions.

Check Your Insurance Too

Your household insurance may not automatically cover all business use.

Potential issues include:

company-owned computers;
stock;
equipment;
employees;
customers visiting; and
additional liability risks.

Make sure the insurer has enough information to ensure the appropriate cover remains in place.

Could Business Rates Apply?

Potentially.

A normal small home office does not automatically become separately rateable business premises.

But the risk increases where the area is clearly separated and used commercially.

Relevant factors could include:

exclusive business use;
physical alteration;
employees;
customers;
signage; and
separation from the domestic accommodation.

A useful general principle is:

MORE COMMERCIAL OCCUPATION = MORE PROPERTY CONSEQUENCES

Don’t Accidentally Create a CGT Problem

Private Residence Relief normally protects the gain on your main home.

But where part of the property is used exclusively for business, relief can potentially be restricted on that part.

That is why the agreement should reflect reality.

A room used:

Monday-Friday as an office and genuinely as a spare room at other times

may be very different from:

a permanently exclusive company office

The attached material similarly highlights the distinction between mixed use and exclusive business use for Private Residence Relief purposes.

Don’t manufacture artificial personal use.

But equally:

Don’t give the company more exclusive rights than it genuinely needs.

This matters for:

CGT + PLANNING + FRS 102

The New FRS 102 Home-Office Lease Issue

This is where I think the article becomes particularly distinctive.

For accounting periods beginning on or after:

1 JANUARY 2026

FRS 102 Section 20 introduced a substantially revised lessee-accounting model.

Previously, a straightforward operating lease might simply produce:

Profit & Loss Account

Rent expense

Balance Sheet

No corresponding lease asset or lease liability.

Under revised FRS 102, many qualifying leases are brought onto the lessee’s balance sheet.

The company may recognise:

RIGHT-OF-USE ASSET

and:

LEASE LIABILITY

The supporting accounting analysis identifies the same right-of-use model and replacement of straight rental expense with depreciation and interest for most FRS 102 lessee arrangements.

Calling It a Licence Doesn’t Necessarily Stop It Being a Lease

Suppose the document is headed:

Home Office Licence to Occupy

That doesn’t automatically determine the accounting treatment.

FRS 102 looks at the substance of the arrangement.

If your company obtains the right to control use of an identified asset for a period in exchange for consideration, the arrangement could contain a lease.

For example:

“The first-floor study measuring 14 square metres”

is much more clearly an identified asset than a general permission:

“The company may use suitable workspace somewhere within the house as available.”

The underlying analysis similarly notes that identifying and controlling a particular room can cause a home-office arrangement to fall within revised Section 20 even if the document is called a licence.

FRS 102 Worked Example – Consultancy 4 Business Ltd

Let’s use the same company.

Consultancy 4 Business Ltd enters into an arrangement for use of an identified room.

Assume:

Monthly payment

£400

Lease term

3 years

Number of payments

Total contractual payments:

£400 × 36 = £14,400

Now assume, purely for illustration:

Discount rate = 5% per annum

The precise rate would need to be determined under the requirements of FRS 102.

The present value of the payments is approximately:

£13,350

Assuming no material initial direct costs, incentives or prepayments, the opening accounting entry might therefore be approximately:

Debit

Right-of-use asset £13,350

Credit

Lease liability £13,350

Nothing about the monthly £400 cash payment has changed.

But the accounting has.

What Happens in Year One?

Assume the right-of-use asset is depreciated evenly over three years.

Opening ROU asset

£13,350

divided by:

3 years

gives approximate annual depreciation of:

£4,450

The lease liability also attracts interest.

Using our simplified 5% assumptions and monthly payments, first-year interest would be approximately:

£580

So instead of the Profit & Loss Account simply showing:

Rent expense £4,800

it may approximately show:

Year 1 charge	Amount
Depreciation	£4,450
Finance/interest expense	£580
Total approximate P&L charge	£5,030

Meanwhile, cash paid remains:

£4,800

This illustrates the front-loading effect of lease interest.

What Could Consultancy 4 Business Ltd’s Balance Sheet Show?

At commencement:

Right-of-use asset

£13,350

Lease liability

£13,350

After roughly one year:

ROU asset

£13,350

less depreciation £4,450

£8,900

The remaining lease liability might be approximately:

£9,130

depending on the exact amortisation calculation.

The accounts might therefore contain approximately:

Fixed / Non-Current Assets

Right-of-use property asset:

£8,900

Creditors – amounts falling due within one year

Lease liability:

approximately £4,400

Creditors – amounts falling due after more than one year

Lease liability:

approximately £4,700

The precise current/non-current split would come from the full lease amortisation schedule.

Same £400 a Month – Different Accounts

This is perhaps the simplest way of understanding the new rules.

	Old Operating Lease Treatment	Revised FRS 102
Cash rent paid	£4,800	£4,800
Rent expense	£4,800	—
Depreciation	—	~£4,450
Interest	—	~£580
Right-of-use asset	No	Yes
Lease liability	No	Yes
Rent reduces EBITDA	Yes	No

The cash flow hasn’t changed.

But:

THE PROFIT PRESENTATION AND BALANCE SHEET HAVE

Potential impacts can include:

higher reported assets;
higher liabilities;
changed EBITDA;
changed gearing;
increased finance costs; and
potentially altered lender covenant calculations.

For a very small home-office payment these figures may be immaterial.

For a larger director-owned company with a substantial multi-year arrangement, the issue deserves proper consideration.

Could a 12-Month Arrangement Be Simpler?

Potentially.

Revised FRS 102 includes a recognition exemption for qualifying:

SHORT-TERM LEASES

Broadly, where the relevant conditions are met and the exemption is elected, payments can continue to be recognised as expenses rather than creating a right-of-use asset and lease liability.

The supporting material identifies the exemption for qualifying leases with a term of 12 months or less.

But don’t create a fictional:

“12-month agreement renewed automatically forever”

simply to avoid lease accounting.

The actual rights and commercial substance need to support the accounting treatment.

What If the Company Uses FRS 105?

This distinction is very important.

Don’t automatically apply the revised FRS 102 lease model to every small owner-managed company.

Many micro-entities report under:

FRS 105

The accounting treatment can therefore be different.

The first question should always be:

FRS 102 OR FRS 105?

before calculating a right-of-use asset and lease liability.

There is another accounting point.

The director/homeowner and their own company are related parties.

A home-office rental arrangement therefore needs to be considered under the applicable related-party disclosure rules.

For FRS 102 entities, relevant matters can potentially include:

nature of the relationship;
amount paid;
outstanding balances;
lease terms; and
commitments.

The attached analysis identifies home-office rent as a related-party transaction and leases/commitments as potentially relevant disclosure matters.

Putting Everything Together

Consultancy 4 Business Ltd:

uses a room in the director’s home;
pays £400 per month;
is VAT registered;
buys its own office equipment;
and applies FRS 102.

Rent

£4,800 per year

Equipment

Computer/monitors:

£3,000 + £600 VAT

Furniture/equipment:

£1,500 + £300 VAT

Potential considerations include:

COMPANY

Home-office payment:

£4,800

Qualifying equipment expenditure:

£4,500

Potential VAT recovery:

£900

subject to the normal conditions.

DIRECTOR

Rental income:

£4,800

less qualifying expenditure.

CGT

Avoid unnecessary exclusive business rights where genuine domestic use continues.

PLANNING

Check whether the use remains incidental to residential occupation.

Consider a Certificate of Lawfulness where useful.

MORTGAGE

Check lender restrictions.

INSURANCE

Ensure business use and equipment are appropriately covered.

FRS 102

If the agreement constitutes a three-year lease:

approximately:

£13,350 opening ROU asset

and:

£13,350 opening lease liability

rather than simply £400 rent expense every month.

This is why the arrangement should be considered as:

ONE COMPLETE PACKAGE

12 Questions to Ask Before Charging Your Company Home-Office Rent

Does the company genuinely need the workspace?
What is a commercially supportable rent?
Who legally owns the home?
What household expenditure can be allocated?
Will genuine domestic use continue?
Should the company buy the office equipment?
Can capital allowances be claimed?
Can VAT be recovered?
Does planning permission need consideration?
Would a Certificate of Lawfulness provide useful certainty?
Have the mortgage and insurance conditions been checked?
Does revised FRS 102 lease accounting apply?

Frequently Asked Questions

Can my limited company pay me rent for a room in my home?

Potentially yes, where there is genuine business use and the amount is commercially supportable.

Is the rent tax-free?

No. It is generally property income, although qualifying expenses may reduce the taxable profit.

Is the £312 allowance simpler?

Yes. In many cases it is considerably simpler and involves much less administration.

Can my company buy the office computer, furniture and equipment?

Potentially yes. Qualifying expenditure can potentially attract capital allowances and, where appropriate, VAT recovery.

Will I lose Private Residence Relief?

Not necessarily. The particular CGT concern is exclusive business use of part of the home.

Do I need planning permission?

Not necessarily. Incidental homeworking may not amount to a material change of use, but more substantial commercial activity should be checked.

What is a Certificate of Lawfulness?

It can provide formal confirmation from the planning authority that the proposed use or development described in the application would be lawful.

Does a licence count as a lease under FRS 102?

Potentially. The accounting treatment depends upon the substance of the company’s rights rather than simply the title printed on the agreement.

Will the home-office arrangement appear on the balance sheet?

Where FRS 102 applies, the arrangement contains a lease and no recognition exemption is available, potentially yes.

Download Our Example Home Office Licence Agreement

If you’re considering charging your company rent, we’ve prepared an example Word template covering:

the workspace;
permitted company use;
genuine continuing domestic use;
rent;
household outgoings;
company equipment;
planning;
mortgage and insurance;
visitors and employees;
termination;
FRS 102 review; and
a pre-signing checklist.

[Download the Example Home Office Licence Agreement]

The template should be adapted to the circumstances. More substantial property rights or formal commercial occupation may require specific legal advice.

Bicknell Business Advisers’ Home Office Review

Before putting an arrangement in place:

USE → RENT → TAX → EQUIPMENT → VAT → PROPERTY → PLANNING → ACCOUNTING → AGREEMENT

USE

What does the company genuinely need?

RENT

What is the commercial value of the space and facilities?

TAX

What does the company save and what personal tax arises?

EQUIPMENT

What should the company purchase and own?

VAT

What input VAT can properly be recovered?

PROPERTY

Consider CGT, business rates, mortgage and insurance.

PLANNING

Does the use require permission or would a Certificate of Lawfulness provide useful certainty?

ACCOUNTING

FRS 102 or FRS 105?

Does the agreement contain a lease?

Does an exemption apply?

AGREEMENT

Only then document what has actually been agreed.

Bicknell Business Advisers’ Advice

The mistake is focusing only on:

“How much rent can I charge my company?”

A proper home-office review potentially involves:

CORPORATION TAX

↓

PERSONAL TAX

↓

VAT

↓

CAPITAL ALLOWANCES

↓

CGT

↓

PLANNING

↓

MORTGAGE / INSURANCE / BUSINESS RATES

↓

FRS 102

For some directors, the conclusion will be:

JUST CLAIM £312

For others, particularly where their company makes substantial genuine use of their home, a properly structured rental arrangement could be considerably more valuable.

The key is to calculate the whole position before signing the agreement.

How We Can Help

At Bicknell Business Advisers, we can help directors and owner-managed companies assess whether renting part of the home to the company makes financial and commercial sense.

We can assist with:

£312 versus rent calculations;
commercial rent calculations;
household-cost apportionments;
Corporation Tax;
property Income Tax;
VAT;
capital allowances;
CGT and Private Residence Relief;
FRS 102 lease assessment;
right-of-use asset calculations;
lease-liability schedules;
related-party accounting; and
home-office rental documentation.

Where specialist planning or property-law advice is required, those issues can be identified before documents are signed.

About the Author

How Landlords Can Legally Reduce Tax by Changing the Split of Rental Income

a couple saving tax on their property investment

A Complete Guide to Form 17, Deeds of Trust and Beneficial Ownership

If you own a rental property jointly with your spouse, civil partner or partner, you could be paying more Income Tax than necessary.

Many landlords assume rental income must always be split equally between the owners. In fact, the tax position depends on who owns the property, how it is owned and whether you are married or unmarried.

Since the abolition of the Furnished Holiday Letting (FHL) tax regime from 6 April 2025, understanding these rules has become even more important. Many former holiday-let owners who never previously needed to think about Form 17 may now need to review how their rental income is taxed.

The good news is that, with the right ownership structure and careful planning, many landlords can legitimately reduce their family’s overall tax bill.

The key is getting the ownership structure right before submitting tax returns.

Harry and Megan’s Story

Let’s start with a typical example.

Harry earns £130,000 a year and pays Income Tax at the additional rate.

Megan earns £22,000 and pays tax at the basic rate.

Together they own two buy-to-let properties producing rental profits of £30,000 a year.

They assume the profits must be split equally.

Many landlords do.

But depending on their circumstances, that may not be the most tax-efficient solution.

Whether they can change the split depends on one important question…

Are they married?

The answer completely changes the tax rules.

Could You Save Tax?

Decision Tree

Why Does This Matter?

Imagine rental profits of £30,000.

Owner	Equal Split	90/10 Split
Harry	£15,000	£3,000
Megan	£15,000	£27,000

The actual tax saving depends on each person’s wider tax position, but where the legislation allows a change in beneficial ownership, the family’s combined Income Tax liability could be significantly lower.

Of course, tax should never be the only consideration. Changing ownership may also affect Capital Gains Tax, Stamp Duty Land Tax and Inheritance Tax.

Married Couples and Civil Partners

This is where many landlords are surprised.

Most people assume that tax follows ownership.

For married couples, it often doesn’t.

Where spouses or civil partners live together, HMRC normally taxes income from jointly owned property 50:50, regardless of the actual beneficial ownership, unless the statutory exception applies.

For example:

Beneficial Ownership	HMRC Default Tax Position
Husband 90%	50%
Wife 10%	50%

Many landlords don’t discover this until after filing their tax returns.

Form 17 Explained

Fortunately, HMRC allows married couples and civil partners to be taxed according to their actual beneficial ownership.

This is done by submitting Form 17. https://www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17

If you want to change the ownership split, the beneficial ownership must first be changed and properly documented — commonly using a Deed or Declaration of Trust. Married couples and civil partners then use Form 17 to ask HMRC to tax the rental income in those actual ownership proportions.

Form 17 does not create or change beneficial ownership. It tells HMRC to recognise unequal beneficial ownership that already exists. If you currently own the property 50:50 and want a 90:10 split, the ownership must be changed first and supported by appropriate evidence.

To use Form 17:

the property must genuinely be owned in unequal beneficial shares;
those shares must be supported by legal evidence, usually a Deed of Trust;
Form 17 must normally reach HMRC within 60 days of being signed.

⚠ Important

Form 17 does not change ownership.

It simply tells HMRC how you already own the property.

Many people get this the wrong way round.

The April 2025 FHL Changes

One of the biggest changes affecting landlords has received surprisingly little attention.

Until 5 April 2025, Furnished Holiday Lettings were taxed under a separate regime.

From 6 April 2025, that regime was abolished.

Former FHL properties are now generally taxed in the same way as other residential lettings.

For many married couples this means that, if they wish to be taxed other than 50:50, they will normally need:

unequal beneficial ownership; and
a valid Form 17 declaration.

If you owned an FHL before April 2025, now is a good time to review your ownership structure.

Unmarried Couples

The rules are completely different.

This catches many landlords out.

Unmarried couples cannot use Form 17.

Instead, HMRC taxes rental income according to the actual beneficial ownership.

Suppose Harry and Megan own a rental property.

Harry owns 80%.

Megan owns 20%.

The rental profits are normally taxed:

Harry – 80%
Megan – 20%

There is no Form 17.

No declaration is sent to HMRC.

The ownership simply needs to be properly documented.

What Is a Deed of Trust?

A Deed of Trust records the beneficial ownership of a property.

It is often used where co-owners wish to hold different ownership percentages.

For example:

50/50
80/20
90/10
99/1

A properly drafted Deed of Trust can provide the evidence HMRC expects where beneficial ownership is unequal.

However, it is far more than a tax document.

Changing beneficial ownership may also affect:

Capital Gains Tax
Inheritance Tax
Stamp Duty Land Tax
divorce settlements
entitlement to future sale proceeds

Professional advice should always be taken before changing ownership.

Don’t Forget Stamp Duty Land Tax

Many landlords overlook SDLT.

Where there is an outstanding mortgage, changing ownership percentages can sometimes trigger SDLT because one owner is treated as taking responsibility for a greater share of the mortgage debt.

This can arise even where no money changes hands.

It’s another reason why tax and legal advice should be taken before signing a Deed of Trust.

Seven Expensive Mistakes Landlords Make

❌ Assuming Form 17 changes ownership.

❌ Filing Form 17 without changing beneficial ownership.

❌ Missing the 60-day deadline.

❌ Assuming unmarried couples can use Form 17.

❌ Forgetting the FHL rules changed from April 2025.

❌ Ignoring SDLT implications.

❌ Downloading a template Deed of Trust from the internet without taking advice.

The Biggest Tax Mistakes Made by New Landlords – Steve J Bicknell Tel 01202 025252

Planning Opportunity

Sometimes changing the ownership percentages is the right answer.

Sometimes it isn’t.

If:

one owner pays additional-rate tax;
you’re planning to build a larger property portfolio; or
you’re buying more rental properties,

it may be worth considering whether holding future properties through a limited company would be more tax-efficient.

This isn’t the right solution for everyone, but reviewing the options before purchasing another property can avoid expensive restructuring later.

For more information, read our article:

Tax Benefits of Incorporating Your Property Portfolio https://stevejbicknell.com/2025/05/03/tax-benefits-of-incorporating-your-property-portfolio/

Married or Unmarried? At a Glance

Question	Married / Civil Partners	Unmarried Couples
Default tax split	50:50	Beneficial ownership
Form 17 available?	Yes	No
Deed of Trust useful?	Yes	Yes
Can ownership percentages differ?	Yes	Yes
SDLT implications possible?	Yes	Yes

Frequently Asked Questions

Can Form 17 be backdated?

No. HMRC requires the declaration to be submitted within the statutory time limit.

Can unmarried couples use Form 17?

No.

Does Form 17 change ownership?

No.

Does a Deed of Trust change ownership?

Yes, it records the beneficial ownership between the parties.

Can changing ownership trigger SDLT?

Yes, particularly where a mortgage exists.

How We Can Help

At Bicknell Business Advisers, we regularly advise landlords and property investors on:

Form 17
Beneficial ownership
Deeds of Trust
SDLT planning
Capital Gains Tax
Property ownership structures
Incorporation planning

The best time to seek advice is before ownership changes are made.

A short planning meeting today could save tax for many years to come.

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, SDLT, Capital Gains Tax and tax planning for landlords, developers and property investors throughout the UK.

HMRC Update: New Evidence Rules for £312 Working From Home Allowance (Effective 14 October 2024)

Directors and business owners who claim the £312 flat rate per year (£6 per week) for working from home should be aware of a key policy change from HMRC, effective 14 October 2024. Going forward, claims for this relief must be supported by a formal obligation to work from home, such as a clause in a service agreement, contract, or board resolution.

This change represents a shift from previous practice, where many directors and employees could claim the relief on a discretionary or informal basis. HMRC is now tightening its stance — and the lack of documented obligation will invalidate claims.

🔍 What’s Changed?

From 14 October 2024, HMRC will only accept P87 claims for homeworking expenses if there is written evidence that the employee or director is contractually required to work from home.

The key requirements include:

A written agreement (e.g., employment contract, service agreement, or board resolution).
A regular and frequent homeworking pattern, typically as a guide at least two days per week, though not necessarily on the same days. The days are not specified in Evidence required to claim PAYE (P87) employment expenses – GOV.UK
Voluntary or informal homeworking arrangements no longer qualify.

✅ What Does This Mean for Directors?

If you’re a limited company director working from home, you should:

Update your service agreement or contract to include a homeworking clause.
Pass a board resolution confirming the homeworking requirement.
Ensure the arrangement is regular and necessary for business purposes.
Retain all documentation as part of your company’s formal records.

✍️ Sample Wording for Compliance

To help you stay compliant, below is a model clause that can be included in a service agreement or board resolution:

📄 Homeworking Requirement – Example Clause

“The Company requires the Director to work from their home address at [insert address] for a minimum of [insert number] days per week. This arrangement is a condition of employment and is necessary for the proper performance of the Director’s duties. The Director’s home is deemed an official workplace for the purposes of fulfilling their role and responsibilities. The Company will review this arrangement annually, but it will remain in place unless varied in writing by mutual agreement. The Director must ensure that their homeworking environment is suitable for conducting business and agrees to be available and contactable during normal business hours on homeworking days.”

🗂️ Supporting Board Resolution – Example

“At a meeting of the Board of Directors held on [insert date], it was resolved that [Name of Director] is contractually required to work from home at least [insert number] days per week as part of their duties for the Company, with effect from [insert date]. This resolution is to be retained with the Company’s records as evidence of the homeworking requirement.”

💡 Claims Above £312?

If actual costs exceed the £6 per week flat rate, higher claims may be allowable, but these will require:

Strong supporting documentation, and
In some cases, pre-approval from HMRC.

🛠️ Next Steps

If you currently claim the flat rate and do not have documented homeworking requirements in place:

Review your existing contracts.
Draft a resolution or contract amendment now.
Contact Bicknell Business Advisers for assistance in formalising the arrangement.

Charging interest on a Directors’ Loan Account

When you’re the director of a business, it’s likely that there will be occasions where you borrow money directly from your company, or inject your own capital into the business.

A Directors’ Loan Account (DLA) keeps track of this money owed between the company and its directors. In many companies, the account is in credit – i.e. the company owes money to the director. This can be due to directors injecting startup capital into the company, not drawing dividends they are owed, or other expenses that have been subsidised by the director.

In these situations, it’s worth considering charging interest on the balance that’s due. But how do you do this? And what impact does charging interest have for the director and company?

Understanding interest on Directors’ Loan Accounts

Let’s take a look at some of the rules around applying interest on DLAs, and the potential benefits this can bring to your company and tax planning.

Any interest paid re these DLAs will be deductible when calculating your company’s taxable profits. Because of this, it’s possible to achieve tax savings of up to 25%.
For the individual, a basic-rate taxpayer has a Personal Savings Allowance (PSA) of £1,000 and will pay 20% on the excess. So, paying interest is more tax-effective than declaring dividends. The PSA for a higher-rate taxpayer is £500.
The interest rate needs to be a commercial rate. In other words, the interest rate used must not exceed the rate you’d expect to see from a third-party lender.
Where interest is paid to an individual, basic rate tax needs to be deducted at source from any payment made to the director.
This tax is reportable to HM Revenue & Customs (HMRC) on a calendar-quarterly basis, with the amount deducted offset against tax due on the individual’s personal tax return. Where the company accounts are not drawn up to a calendar-quarter end, a fifth return is required up to the balance sheet date.
The company can take into account any interest due, but not paid, until up to twelve months later when calculating its own profits. However, the individual will only include as income any interest that’s actually been paid. Note though that ‘paid’ can include crediting to a DLA!. This can give a timing advantage.

Talk to us about maximising the tax benefits of your DLA

Any interest you receive is not subject to National Insurance Contributions (NICs) and is particularly tax effective when shielded by the Personal Savings Allowance (PSA).

The reporting requirements for interest on DLAs are no walk in the park.

How do you pay interest to a director or individual lender? CT61 – Steve J Bicknell Tel 01202 025252

Are you missing out on Qualifying Interest Relief? – Steve J Bicknell Tel 01202 025252

Understanding the Tax Consequences of s455 Directors Loan: A Guide for UK Business Owners – Steve J Bicknell Tel 01202 025252

Because of this, it’s a good idea to talk to us first, so we can make sure you have a workable system in place prior to making any payments. We can also give an opinion of the acceptability of the proposed rate of interest to pay, and how it measures up against current market rates.

Get in touch to talk about interest on your DLA.

steve@bicknells.net

Bicknell Business Advisers Limited

40 Broadway Lane, Bournemouth

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Pablo Alonso ★★★★★ 5 years ago
I have known Steve for a couple of years and he has always been very helpful. He is pro-active and very knowledgeable. His advice is certainly top and I completely recommend him
Steve Upton ★★★★★ 5 years ago
As is often the case, the most valuable business relationships are generated by word of mouth. Working as a Director of the Southern Electric Traction Group C.I.C in London, Bicknell Business Advisers Limited were recommended to me by a … More fellow business owner. I am truly grateful for that recommendation. I can honestly say that the guidance and support we have received from the team have been instrumental to our work and we would be in a considerably lesser position without them.
I haven't the words to fully express Bicknell's input, but perhaps the phrase "no question goes unanswered, no effort is spared" best sums up their approach to client support. I would wholeheartedly recommend Steve and his colleagues in any advisory capacity and am delighted that we have found such a professional, efficient and courteous company with which to do business.
Simon Clarke ★★★★★ 6 years ago
Where do I start? Steve, Kate, and their team are professional and tenacious. They go above and beyond to make sure you file correctly and file on time, as well as advising on anything financial. If you're looking for a top quality … More accountant, look no further, they're right here.
Izan Coomonte Suárez ★★★★★ 6 years ago
I would recommend Steve 100% to anyone! He's the best advisor and tax professional I've found in many years. As a Spanish citizen, he has helped me a lot not only become very efficient with my taxes but also understand how the … More UK Tax system works!
He is friendly, professional and delivers a lot of value to the people he works with.
Mutaz Qubbaj ★★★★★ 7 years ago
Steve and his team have been an invaluable asset to Squirrel as of day 1. They never cease to hit the mark when it comes to our accounting, payroll and R&D-related needs. The depth of knowledge and expertise to address the challenges … More of running a small business on the path to becoming a growing concern has exceeded expectations. The team is extremely approachable and willing to drill into the details with myself and members of my team at every opportunity.
Gill Alder ★★★★★ 6 years ago
I have known Steve Bicknell for around 20 years and have always found
him to be an extremely knowledgeable professional, with a down to earth
approach - always able to explain technical info in a way that is easy to understand.
I always … More recommend him to friends and business acquaintances and will continue to do so, as a person of integrity and professionalism.