We receive many enquiries from directors of trading companies. Typically, IT consultants are looking to use their company funds to purchase investment properties in their trading company. However, in doing this, the director may jeopardise their privilege to many benefits of operating a trading company. Here is why.
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, allows you to pay Capital Gains Tax at the rate of 10% (increasing to 14% from 6th April 2025 and then 18% from 6th April 2026) on qualifying disposals. BADR is available to individuals on lifetime gains of up to £1 million.
BADR is particularly advantageous upon the winding up or sale of a limited company if certain qualifying conditions are met. To qualify for BADR, an individual must own a trading company that has been trading for at least 2 years up to the date of sale.
However, by acquiring investment properties in the trading company, this may taint the company’s qualifying status for BADR.
There is no simple formula for how this is measured as it requires the identification of the trading and property letting activities and then considering whether the property letting is substantial in the context of the company’s activities as a whole.
If the company’s receipts from letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, it is unlikely that the company would be a trading company for BADR purposes.
For practical purposes, some consideration can be given from accounts submitted as to the level of property letting income and the asset base of the company. Where neither of these suggest the non-trading element exceeds 20%, the case is unlikely to warrant any more detailed review.
Whereas, if a director of a trading company incorporates a separate investment limited company for their property investments, there will be no detriment to the director’s eligibility for BADR on the disposal of the trading company.
Any ownership of a business, or share of a business, is included in an individual’s estate for Inheritance Tax purposes. When you pass away, the value of your limited company may be subject to a death tax charge at the rate of 40%. Business Property Relief reduces the value of a business or its assets when working out how much Inheritance Tax has to be paid.
If shares are held in a trading limited company and have been held for at least 2 years up to the date of death, the shares will be exempt from IHT by way of Business Property Relief.
However, letting properties in a trading company will impact the company’s eligibility to claim Business Property Relief.
Most limited companies can qualify for BPR if they pass the 50% trading test. This means less than 50% of a business’s activity needs to be made up of investment activities.
Therefore, by purchasing property in a separate investment company, the trading company will not run the risk of losing its entitlement to Business Property Relief for Inheritance Tax, whilst allowing the company director to go forward with their property investment plans.
If a trading company goes bankrupt, it may have to sell off all of its assets in order to pay its debts. If there are properties in the company, there is the risk that the company will lose the properties.
This is another reason why it is highly recommended to purchase property into a separate investment company to ensure the longevity of the business. If the trading company were to go bankrupt, the properties would be protected.
Nearly all Buy to Let mortgage lenders stipulate that you use a Special Purpose Vehicle (SPV) to hold and let rental property. An SPV is a limited company set up for one specific purpose. There is an insistence that the company is used solely for this purpose, hence the name – Special Purpose Vehicle.
Mixing in trading activity risks exposure of the assets to vexatious claims and prevents a clear picture of the rental income and expenses, so would not be allowed by the lender.
If you would like to discover more on how we can help you with this matter then please get in touch on 01902 711370 or email enquiries@uklandlordtax.co.uk.
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
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