Landlord accountancy

Special Purpose Vehicle Company

Using a Special Purpose Vehicle Company to expand your property portfolio

A Special Purpose Vehicle (SPV) company is a non-trading company that exists exclusively for buying, selling, and letting property. Continue reading to discover why you should consider the SPV route when setting up a limited company.

What is a Special Purpose Vehicle Company?

An SPV company is often used for the sole purpose of buying, managing and selling buy-to-let property. It is usually seen as a ‘bankruptcy-remote entity’ because the company’s operations are limited to the financing and purchasing of specific assets. In property investment, an SPV company can purchase and hold property assets. An SPV company has its own legal status, assets, and liabilities and is often used to isolate financial risk. You can keep multiple properties under one SPV company to rent out each month and build your buy-to-let portfolio.

How does a Special Purpose Vehicle Company work?

The operations of an SPV company are limited to financing and acquiring specific assets, such as property. When property is purchased through an SPV company, the company owns the property instead of you, and the mortgage is taken out in the company’s name. You pay money into the SPV company, which can be used as a deposit for properties; a limited company buy-to-let mortgage can cover the rest of the property’s price.

What is the difference between a Special Purpose Vehicle Company and a limited company?

Two commonly used business structures for property investment and financing are an SPV company and a trading limited company. Both serve distinct purposes, and it’s important to understand the differences before deciding on the structure to use for your property business.

A limited company is a separate legal entity from its directors or shareholders and is commonly used for a wide range of business activities, including property investment. When it comes to property investment, lenders will often ask for personal guarantees from the company directors, which eliminates some of the financial protection a company structure would otherwise offer.

Like a limited company, an SPV company is a separate legal entity. However, the key difference lies in its scope and objectives. An SPV company is a single-purpose company. For example, in relation to property, its sole purpose will be to purchase and manage properties, whereas a limited company is for a more general business structure.

You may find a better choice of lenders who will accept buy-to-let mortgage applications made through an SPV company as opposed to a trading limited company, which is also being used for another type of business. This is because when two businesses are run under the same limited company structure, the financial performance of each one affects the other. If the trading company were to fail, it would affect the property investment business.

Always seek advice from an experienced property investment professional who can provide further guidance and help you make an informed decision.

The advantages of using a Special Purpose Vehicle Company

There are many advantages of using an SPV company to purchase and manage your buy-to-let portfolio:

• You can build and grow your buy-to-let property portfolio quickly and easily, as the same SPV company can be used for multiple properties, reducing administration and ongoing costs.
• SPV companies are usually preferred to trading limited companies by buy-to-let lenders who offer mortgages to corporate vehicles as they are easier to understand and quicker to underwrite.
• There is isolated financial risk as the SPV company operates as a separate legal entity, and your personal assets are safeguarded against potential financial losses incurred by the SPV company.
  You can control how much income is taken from the company to manage your Income Tax liability. You can leave the money in the SPV company if you do not need to withdraw it.
• It is also possible to grow your buy-to-let property portfolio quickly through an SPV company. No Income Tax is due on the retained profit, which gives you more capital to reinvest.
• Purchasing property through an existing company could mean you lose the benefit of closing that company down via a Members Voluntary Liquidation (MVL) and efficiently withdrawing the retained profits tax. However, if you purchase buy-to-let property through an SPV company, you can keep it as a separate entity and not lose the benefit of closing the existing company down via an MVL.
• The income you receive if you own a buy-to-let is taxed as part of your income. The tax on your income is then charged in accordance with your income tax band (20% basic rate, 40% higher rate and 45% additional rate). Meanwhile, with an SPV company, Corporation Tax is due instead. This could work out cheaper for some investors as Corporation Tax is charged at 19-25% depending on your company’s profits.
• An SPV company can often benefit higher-rate taxpayers, as buy-to-let mortgage interest payments and other finance costs can be deducted as a business expense and used to reduce the Corporation Tax bill. In contrast, private landlords can no longer deduct mortgage interest against rental income, which could significantly increase their tax bill.

The disadvantages of using a Special Purpose Vehicle Company

There are also a few disadvantages to consider before proceeding with a SPV company:

• SPV company buy-to-let mortgages can cost more than normal buy-to-let mortgages. Lenders sometimes charge more to cover the extra paperwork, and interest rates are often higher.
• If you do not set up a SPV company before purchasing the property, you will need to sell the property to the SPV company. This will incur additional costs such as Stamp Duty Land Tax, legal fees, and potentially Capital Gains Tax. It could also push you into the higher rate tax brackets.
  You may find there is a slightly reduced choice for lenders who offer SPV company buy-to-let mortgages.
• The SPV company is responsible for its debts, which means the director’s (and shareholders’) personal assets are protected if the property is repossessed or the business cannot keep up with the mortgage payments. However, there is a caveat: Some lenders may require a personal guarantee from the directors of the SPV company. The directors put their own assets—such as a home—up as security against the funding agreement and may be liable for the debt if anything happens.
• When a company sells a property, there is no Capital Gains Allowance. However, when an individual sells a property, they have a £3,000 tax-free allowance (2024/25).
• If you draw all rental profits as income, Corporation Tax is due at 19-25%, depending on your company’s profits. The director will also pay Dividend Tax at the basic rate (8.75%), the higher rate (33.75%) or the additional rate (39.35%).

Why should you set up a Special Purpose Vehicle Company before purchasing the property?

If you buy a property in your own name you will pay Stamp Duty Land Tax on properties over £250,000. The amount you pay will range from 5% to 12% depending on the property’s value, the purchase date and whether you are a multiple homeowner. You will also be required to pay legal fees.

If you decide to manage your property portfolio through an SPV company, transferring a property to an SPV company is not a legal option; the property(s) must be sold to the SPV company at market value. Therefore, setting up the SPV company before you purchase a property is advisable to avoid paying Stamp Duty Land Tax and legal fees twice.

You will need to set the company up before the mortgage begins. However, you can apply for the mortgage before you set up the SPV company. There is also no minimum time for your SPV company to trade for before the mortgage begins.

Schedule a consultation with Churchill Knight & Associates Ltd

Are you interested in learning more about Churchill Knight & Associates Ltd and how we can help your business grow? Whether you want to switch accountants or launch a company for the first time, our professional accountants can help you with your Special Purpose Vehicle Company.

For more information, please call our team today on 01707 871622 to discuss how we could help you set up and assist you with your SPV company. You can also schedule a free consultation, and a member of the team will contact you to discuss your requirements. Alternatively, you can request a quote or schedule a call at a convenient time.

Transferring property to a business

There is a set process for transferring your property – and you must sell it to the new company at the property’s market value. When you transfer your property, you will sell it to a Special-Purpose Vehicle (SPV) company. An SPV is set up to purchase and manage buy-to-let properties, and you can hold multiple properties under one SPV to rent out and build your buy-to-let portfolio.

Advantages of transferring a property to a business

There are plenty of benefits of transferring a property to a business:

• Tax savings are one of the main advantages of transferring a property to a business; you will pay tax on dividends instead of income tax on rental income. The limited company will also pay corporation tax on any profits, which could work out cheaper for some investors. Corporation tax is 19-25%, depending on your company’s profits, and the highest income tax rate is 45%.
• Many individuals choose to transfer their property to a business as there is minimal liability. The property will be held under the company’s name, and the company will exist as a separate legal entity. This means that your personal assets are protected from potential liabilities arising from the property and company, such as claims, debts or accidents.
• Company ownership allows for more straightforward succession planning than when an individual owns a property. A company’s shares can be easily transferred or inherited, ensuring a smoother transition of control and ownership over the property.
• A property owned by a company is often perceived as more credible in the eyes of customers, clients, or tenants, and the enhanced reputation can increase business opportunities. Having a property in a company name may also make it easier to secure investment or financing.
• You can grow your buy-to-let property portfolio quickly through a company as there is no income tax due on the retained profit, giving you more capital to re-invest. You can also use the same SPV company for multiple properties, reducing the ongoing costs and admin.

To learn more about SPV companies and the advantages of using one for your property portfolio, please visit our dedicated SPV company guide (available here).

Disadvantages of transferring a property to a business

There are also some disadvantages to consider before transferring a property to a business:

• The costs associated with setting up a limited company and the ongoing expenses related to maintaining a limited company.
• Some buy to let lenders do not lend to limited companies.
• Once the property has been sold to a limited company, it is owned by the company. If something happens to the company, all its assets, including the property, will be exposed.
• If you choose to sell the property, the money from the sale will go into the company and corporation tax will be due on the profits. To withdraw the money from the sale from the company, it will need to be taken as salary or dividends, and you’ll pay additional tax on that income.

The costs associated with transferring a property to a business

Simply transferring a property to an SPV is not a legal option; the property(ies) must be sold to the SPV at market value. This could incur some or all of the following costs:

• The cost of registering the SPV with Companies House.
• Early Repayment Charges (ERCs): If you are still tied to your existing buy-to-let mortgage,
  Capital Gains Tax when you sell the property(s).
• A limited company typically pays higher mortgage interest costs than a mortgage taken out in a personal name.
• Stamp Duty Land Tax at the higher rate will be payable on the limited company’s purchase, even if it is the SPV’s first property.
• Finance costs are incurred by the limited company when you take out a buy-to-let mortgage.
• Any tax or legal advice you take on setting up a limited company.
• The sale of a property to an SPV does not usually qualify for tax breaks such as Business Asset Disposal Relief or Incorporation Relief, as HMRC regards property as an investment rather than a trade or business.

Always seek the advice of a qualified accountant before selling a property to a business, as everybody’s circumstances are different.

Specialist landlord accountancy with Churchill Knight & Associates

If you are interested in a property portfolio or want to transfer your property to a business, look no further than Churchill Knight & Associates Ltd. We are an expert landlord accountancy provider who works alongside leading cloud-based software providers (FreeAgent) to ensure you manage your business effectively. Our SPV service includes:

• Access to FreeAgent gives you an expense and invoice tracker, 24/7 access, real-time information, and a tax timeline.
• Free SPV company set up.
• All registration with HMRC is completed on your behalf.
• Full set of accounts prepared and submitted to HMRC.
• Tailored tax planning and advice from a dedicated Account Manager.
• Unlimited support via email and phone.
• Company registration for PAYE is available upon request for an additional charge.

Schedule a consultation today

To schedule a consultation to discuss how Churchill Knight & Associates Ltd can help you set up and assist with your SPV company, please call 01707 871622. Alternatively, please complete the short form (available here) to request a free consultation.

Non-resident companies

Tax and non-resident companies

As of the 6th April 2019, the scopes of Capital Gains Tax and Corporation Tax have been extended to now include gains realised by non-UK residents on both direct sales of UK property, and sales of interests held in companies which are deemed to be ‘UK property rich’.

What were the tax changes?

In April 2020, the government declared that non-UK resident companies with UK property income or carrying on a UK property rental business (including those who invest in UK property through collective investment vehicles) would need to pay Corporation Tax instead of Income Tax on profits from UK property. Corporation Tax is charged at 19-25% depending on your company’s profits. The changes do not apply to you if you:

• File an Income Tax Return that is not a Non-resident Company Income Tax Return (SA700).
• Have tax deducted under the Non-resident Landlord Scheme, are not required to notify chargeability to Corporation Tax, and have not received a notice to deliver a tax return.

Additionally, as of April 2019, all residential property gains realised by non-resident companies were also brought into the Corporation Tax regime, including resident property disposals by closely held non-resident companies. Before 2019, only disposals by closely held companies were chargeable. Corporation Tax is also due on gains made on commercial properties.

For more information, please visit the government’s website.

What does this mean for non-UK companies and persons?

The extension applies to both direct property holdings and indirect property holdings.

Direct property holdings

Direct property holdings includes:

• When a non-UK resident individual, trust or company disposes of UK residential or commercial property they own.
• Where commercial holdings have seen an increase in value since 6th April 2019 and UK tax applies to the gain. For residential holdings, the taxable gain is calculated from an earlier date of 6th April 2015.

Indirect property holdings

Indirect property holdings includes:

• When a non-UK resident sells an interest in a ‘UK property rich’ company, any increase in value of the interest since 6th April 2019 is taxable. Please note an entity is property rich if, at the time of disposal, 75% or more of the company’s value derives from UK property (whether commercial or residential).
• The extension also applies when the disposal could be of an interest held in a holding or parent company, where its subsidiary(s) holds UK property. This is known as an ‘indirect holding’ of property rich companies.
• The non-resident and any related parties must have held at least 25% interest in the property rich company in the previous two years or currently have at least 25% interest in the company. Otherwise, the rules do not apply. The 25% rule does not apply to holdings in ‘Collective Investment Vehicles’ (CIVs), and even when there is less than 25% interest, the disposal of any interest held in a CIV is UK taxable.

Are there any exemptions to the rules?

If the property rich company or related party uses the property in a qualifying UK trade (for example, retail, hotel, care home), there is an exemption to the rule. You must prove that the trade existed and was carried on for at least a year before the disposal and will continue after the sale.

Certain linked disposals also qualify for an exemption. For example, when a disposal of an interest in a property rich company takes place and can be linked to other disposals that happen at the same time, where the combined value of the interests being sold and disposed of results in the total value of UK property falling below the 75% threshold, an exemption may apply.

Double taxation treaties between different jurisdictions may impact how tax is applied to the sale of shares in land-rich entities. Alternatively, some investment funds may qualify for the valuable substantial shareholdings exemption for structures meeting qualifying institutional investor requirements.

What tax will you pay?

If the rules apply, UK gains will be calculated using the market value of the property/interest as of the 6th April 2015 for residential property or as of the 6th April 2019 for commercial property. This is the base cost that is usually deductible against sale proceeds.

It is sometimes possible not to use the later market value but the actual cost of the property/interest if it will provide a more favourable result in the calculation.

Non-UK resident companies will pay Corporation Tax at 19 – 25%, depending on their profits. Non-UK resident trustees and individuals will pay Capital Gains Tax between 10% and 28%, depending on whether the property is commercial or residential and whether they are a higher rate taxpayer.

Starting a UK property business on or after 6th April 2020

If you start a UK property business on or after the 6th April 2020, you must notify HMRC that you need to pay Corporation Tax. You will then be registered for Corporation Tax and must file Company Tax Returns. Please visit the government’s website for more information.

Churchill Knight & Associates Ltd are experts in landlord accountancy

For a free and impartial consultation or to discuss how to set up and manage your property portfolio, please call Churchill Knight & Associates Ltd on 01707 871622. You can also schedule a consultation for a time that suits you, and a member of the team will be in touch to answer questions you may have or provide further information about landlord accountancy in the UK.

Rent a room relief (rent a room scheme)

The Rent a Room Scheme

The Rent a Room Scheme allows owner-occupiers and tenants to receive a tax-free rental income if you provide furnished accommodation in your main or only home.

What is the Rent a Room Scheme?

The Rent a Room scheme lets you earn up to £7,500 per year tax-free from letting our furnished accommodation in your home. This is reduced to £3,750 if someone else receives income from letting accommodation in the same property, for example, if you are a joint owner and share the income with your partner or someone else.

You can let out as much of your home as you want, and the limit remains the same even if you let out furnished accommodation for less than 12 months.

Eligibility for the Rent a Room Scheme

You can opt into the scheme at any time if:

• You let a furnished room to a lodger
• You’re a resident landlord, whether or not you own your home
• Your letting activity amounts to a trade, for example, if you run a bed and breakfast or guest house

You cannot use the scheme if:

• Your home has been converted into separate flats
• The room is not furnished
• The accommodation is not part of your main home when you let it
• The accommodation is in your UK home and is let out while you live abroad
• The room is used for business or as an office – you can use the scheme if the lodger works in your home at the weekends or in the evenings or if the lodger is a student who is provided with study facilities

How does it work, and how can I apply for the Rent a Room Scheme?

If your gross receipts (rental income before expenses, any ‘balancing charges’ and any amounts you receive for goods and services such as laundry or cleaning and meals) are less than £7,500 (or £3,750), you’re automatically exempt from tax on that income.

You must complete a tax return if your gross receipts are more than £7,500 (or £3,750). You can then opt into the scheme and claim your tax-free allowance on your tax return.

If your gross receipts are more than £7,500 (or £3,750), you can choose your preferred method to work out your tax:

• Method A: Tax is paid on your actual profit – total receipts minus expenses and capital allowances.
• Method B: Tax is paid on your gross receipts over the Rent a Room relief. E.g. gross receipts minus £7,500 (or £3,750). It is not possible to deduct capital allowances or expenses with this method.

Within one year of 31st January following the end of the tax year, you must let HMRC know if you:

• Want to stop or start paying tax on your gross receipts over the Rent a Room £7,500 (or £3,750) limit – this applies to Method B.
• Do not want to use the Rent a Room scheme as your receipts are below £7,500 (or £3,750). For example, if you want to claim losses.

Please visit the government’s website for more information about the Rent a Room scheme, including how to claim and calculate your receipts.

Contact Churchill Knight & Associates Ltd today

For more information about the Rent a Room scheme, please call us on 01707 871622. Churchill Knight & Associates Ltd has an expert Landlord Accountancy team who can help you set up and manage your property portfolio. To schedule a free consultation, please complete the short form (available here), and a member of the team will give you a call to discuss your business and landlord accountancy requirements.

Furnished Holiday Lettings (FHL)

Special tax rules apply to rental income from properties that qualify as furnished holiday lettings (FHLs). Although they are not actually trades, FHLs are often treated as trades rather than investments and have some tax advantages over other lettings.

What qualifies as a Furnished Holiday Letting?

For accommodation to qualify as a FHL, your property must be:

• In the UK or European Economic Area (EEA), including Norway, Liechtenstein, Iceland
• Furnished – furniture must be provided for normal occupation, and visitors must be able to use the furniture

To qualify as an FHL, your property(s) must be commercially let to make a profit. It will still be treated as a commercial if you let the property out of season to cover running costs but do not make a profit.

All properties in the same area are taxed as a single FHL business. For example, all FHLs in the UK are taxed as a single UK FHL business, and all FHLs in other EEA states are taxed as a single EEA FHL business, and separate records must be kept for each business.

What are the FHL occupancy conditions?

Accommodation can only qualify as a FHL if it meets all three occupancy conditions.

• The pattern of occupation condition: If the total of all lettings that exceed 31 continuous days is more than 155 days your property will not be classed as a FHL for that year.
• The availability condition: Your property must be available for commercial letting for at least 210 days a year. It does not count if you are staying in the property.
• The letting condition: The property must be commercially let as a furnished holiday accommodation to the public for at least 105 days in the year. Longer-term lets of more than 31 days do not count, and letting the property for a reduced rate to family or friends also does not count.

What are the tax advantages of a Furnished Holiday Letting?

There are several advantages of a FHL, depending on your business structure:

• Income generated from a FHL is classed as relevant earnings, which means you can make pension contributions from them.
• If you share ownership of your FHL, profits can be apportioned between the legal owners for tax purposes. For example, a wife and her husband own a FHL and allocate the profits to the lowest earner.
• If you sell your FHL, you may be able to claim certain Capital Gains Tax reliefs, such as Gift Hold-over Relief, Business Asset Disposal Relief, and Business Asset Rollover Relief, which are not available to long-term rental properties.
• Unlike buy-to-let landlords, owners of FHLs can offset all their mortgage interest costs against business profits, which could significantly reduce their taxable profits.
• Typically, no council tax is paid. However, business rates may still be eligible but are much lower than council tax.
• Capital allowances can be claimed on your FHL. For example, the cost of furniture and furnishings and even certain refurbishment costs, such as wiring and plumbing, can be deducted from your pre-tax profits, reducing the tax payable.
• Losses from FHLs could be offset against your other personal income when it is owned personally.

Please note that you must register for VAT if your FHL income exceeds the VAT threshold of £90,000.

Arrange a free and impartial consultation today

Churchill Knight & Associates Ltd provides specialist landlord accountancy services for landlords, including a Special-Purpose Vehicle Company service to enable landlords to grow and manage their property portfolio. To discuss your requirements, please call us on 01707 871622 or arrange a consultation for a time that suits you.

Houses in Multiple Occupation (HMO)

A ‘House in Multiple Occupation’ (HMO) is a property rented to at least three tenants who are not from one ‘household’ (e.g., a family) but share facilities such as a kitchen or bathroom. An HMO is also sometimes referred to as a ‘house share’.

What is a House in Multiple Occupation?

Your property is classed as an HMO if the following apply:

• At least three tenants live there, and they are not part of your family or household or the same household.
• Facilities such as the kitchen, toilet and bathroom are shared.

Always check with your local council to see if you need a licence before renting your property as an HMO. You must hold the relevant HMO licence if renting out a large HMO in England or Wales. Your property is classed as a large HMO if:

• It is rented to five or more people who form more than one household
• Some or all tenants share kitchen, toilet or bathroom facilities
• At least one tenant (or their employer) pays rent

How is income from a House in Multiple Occupation assessed?

Cash basis is often used for most property income by partnerships or individuals whose income is £150,000 or less for the tax year.

For companies, rental income and expenditure are assessed as trading income, and the same tax treatment applies to HMOs and multi-lets. Property businesses must calculate their profits in accordance with Generally Accepted Accounting Principles (GAAP). In other circumstances, property businesses can choose to use GAAP (rather than cash).

What allowable expenses can you claim for Houses in Multiple Occupation?

You can deduct many allowable expenses from your HMO rental income if generated wholly and exclusively from renting out your property. Landlords who own HMOs often pay Council Tax, water rates, and sometimes electricity and gas for the whole property. These can be claimed as an allowable expense if the tenants do not pay or pay you for these bills themselves. Other allowable expenses for HMOs can include:

• Property maintenance and repair costs (e.g. replacing roof tiles or a door).
• Redecorating between tenancies.
• Ground rents and service charges (if applicable).
• Gardening and cleaning costs.
• Management/agent fees.
• Building, contents and public liability insurance.
• Accountancy/bookkeeping fees.

It is important to note that you cannot claim mortgage capital repayments as an allowable expense. Before 2017, it was possible to deduct mortgage interest from your HMO rental income to reduce your income tax liability. Instead, you now receive a 20% tax credit.

Repair work and replacing furnishings or equipment

If you rent out a furnished or part-furnished HMO, you may be able to claim Replacement of Domestic Items Relief for replacing items such as carpets, a bed, a sofa, household appliances, curtains, and kitchenware. The new item must be broadly the same quality and standard, as you can only claim the value of like-for-like replacements.

If you need to carry out some repair work or your HMO requires improvements to ensure it meets standard letting requirements or optimises the maximum rental yield, the tax treatment of those expenses could vary. For example, some costs can be offset against regular rental income. However, others may be treated as capital expenses and will be offset against the capital gains when the property is sold.

The scope of the work generally defines the tax treatment of the expense. HMRC recognises that if expenditure changes the character of the thing being repaired, it must be classified as a capital improvement and not a repair.

Where it meets the relevant definition, a fair apportionment of expenses between revenue and capital is possible. For example, if the property needs work done before it can be let, these expenses can be added to the initial cost of the property acquisition and deducted against the capital gains when the property is sold.

An expense could be treated as a revenue expense if the property’s carpet is replaced with a similar quality and standard carpet, but not if it is replaced with a wooden floor of higher quality and cost.

Always maintain accurate and up-to-date records

If you’re letting an HMO, it is essential that you keep accurate records for each tenant and the amount they pay, as well as information about any work carried out and all invoices.

Churchill Knight & Associates Ltd provide expert landlord accountancy services

Churchill Knight & Associates Ltd provide specialist landlord accountancy services to help landlords manage their buy-to-let property portfolio. If you want to learn more about our Special-Purpose Vehicle Company service or would like to arrange a consultation to discuss your property business requirements, please call 01707 871622. Alternatively, you can schedule a free consultation at a convenient time.

Short-term lets

Short-term property rentals are usually considered ordinary rental income unless the property and income meet the Furnished Holiday Accommodation (FHA) criteria. Continue reading to learn more about short-term lets.

Restrictions on short-term lets

The name may seem self-explanatory, but as a general rule of thumb, a short-term tenancy is a rental property offered to the market for six months or less. Those who wish to use residential premises for short-term accommodation for more than 90 nights in a calendar year must contact their local planning authority (LPA) to make a judgement as to whether a letting amounts to a material change of use for which planning permission must be sought. Alongside planning rules, in some cases, mortgage and lease agreements may prohibit the use of a property for short-term letting.

How is rental income taxed for short-term lets?

The income you receive from short-term property letting is considered regular rental income. You must declare any rent you receive as part of your self-assessment tax return. You can work out the taxable rental profits from short-term property letting by deducting any allowable expenses from the gross rental profits. The tax on your income is then charged in accordance with your income tax band (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers).

It’s important to note that since the 2017/18 tax year, there has been a significant restriction on the deduction of mortgage interest as an allowable expense unless you meet the criteria for Furnished Holiday Lettings. Therefore, from the 2020/21 tax year onwards, mortgage interest cannot be deducted as an allowable expense. Instead, you are given a tax credit of 20%.

Overview of Furnished Holiday Lettings

As a result of the changes to tax relief on mortgage interest payments for buy-to-let properties, many landlords look for ways to improve the tax efficiency of their investments. Those with rental properties in areas with a demand for holiday accommodation may find a Furnished Holiday Let (FHL) is a more attractive option. An FHL is a separate category of buildings that stands apart from commercial and residential properties, as HMRC deems FHLs as a trade.

To qualify as an FHL, the property must be:

• In the UK or European Economic Area.
• The property must be furnished and have sufficient furniture provided for normal occupation, and visitors must be entitled to use it.
• The property must meet the occupancy tests to qualify as an FHL.

The property must be commercially let with the intention of making a profit. If you let the property out of season to cover costs but didn’t make a profit, the letting will still be treated as commercial. For more information about FHLs, please visit the government’s website.

Advantages of Furnished Holiday Lets

Mortgage interest relief

Perhaps the most significant advantage of FHLs over buy-to-lets or short-term rentals is that the total mortgage interest can be deducted from the FHLs’ profits.

Furnishing your property can be tax redeemable

You can claim certain capital allowances on holiday lets that you can’t on typical buy-to-lets. These include costs of refurbishing or upgrading the property, plus furniture, fixtures and equipment to equip the property to meet market standards (which could increase your profit). Capital allowances can be offset against income, meaning you pay less tax and retain more profit.

Pension contributions

Income generated from an FHL property is classed as ‘relevant earnings’, meaning you can make tax-advantaged pension contributions.

When you sell your property

When selling your FHL, certain Capital Gains Tax reliefs are available, including:

• Entrepreneur’s Relief
• Business asset roll-over Relief
• Gift hold-over relief

Business rates

FHLs are treated as a business and subject to business rates based on your property’s rateable value. You may be eligible for Small Business Rates Relief if your business only uses one property or your property’s rateable value is less than £15,000.

Split the profits

With normal rental properties, profits are distributed according to the official ownership split, whereas with an FHL property, you can portion the profit to everyone’s beneficial interest in the property.

Additional taxes may apply

You may also be liable for the following taxes:

• If you are letting short-term accommodation, including holiday accommodation and FHLs, you must register and charge VAT if your turnover exceeds the £90,000 limit.
• If you are a non-resident and are selling a UK property, you must submit a separate non-resident capital gains tax return within 30 days of completion of the sale. Payment is also due within 30 days of completion. However, if you are filing a standard UK tax return, payment can be deferred until the regular deadline of 31st January.
• Council tax is levied on properties, and the rates vary depending on the size of the property and the area it is situated in. For FHLs, you may qualify for a 50% discount, but you will need to apply to your local council.
• When you sell a property, Capital Gains Tax is due on the profit you make on a property that has increased in value.

Are you looking for a dedicated Landlord Accountant?

With over 25 years of experience in accountancy, Churchill Knight & Associates Ltd can help landlords with their buy-to-let portfolios. If you want to set up a Special-Purpose Vehicle Company or switch accountants, our expert Landlord Accountancy team can assist.

For more information, please call our team today on 01707 871622 to discuss how we could help you set up and assist you with your SPV company. You can also schedule a free consultation, and a member of the team will contact you to discuss your requirements.

Property Investment Structure

What are your property investment structure options?

If you are considering setting up a property investment business, you can take three main routes: individual, a limited liability partnership or a limited company (Special-Purpose Vehicle Company). Continue reading to discover more about your options when investing in property.

Individual

Investing in property can be an excellent way to grow your income. Owning property allows you to benefit from rising property values (capital appreciation) while generating a steady income stream from renting the property(s) out.

If you decide to invest in property personally under your name, the property mortgage and deeds will be registered to you as an individual, and you will personally pay income tax on any profits from your buy-to-let property. If you sell the property, you only have to pay Capital Gains Tax on the overall gains above your tax-free allowance of £3,000.

Limited liability partnership

A Limited Liability Partnership (LLP) is an entity formed by two or more individuals. Like a limited company, the liability of an LLP’s members is limited to the amount they contributed. Partners are not personally liable to pay the debts the LLP is unable to settle.

Profits earned by the LLP are shared among the partners and count as their personal income (rather than the income of the LLP itself). Therefore, LLPs do not pay Corporation Tax; instead, LLP members must pay Income Tax on the income generated from the profits. Profits earned from a LLP can be included as relevant earnings for the purpose of pension contributions.

Unlike limited companies, borrowing for LLPs is not as easy. Lenders consider LLPs risky in terms of the loan’s recoverability as partners are not personally liable for debt. Additionally, as all profits are allocated to the partners in the same tax year, the LLP cannot retain the company’s profit (after paying tax) to reinvest, fund future ventures, or cover costs.

Limited company (Special-Purpose Vehicle Company)

There has been a significant increase in the number of people setting up limited companies to buy and grow their property portfolio. The type of limited company used is called a Special-Purpose Vehicle (SPV) Company. If you choose to invest in property through an SPV company, the company will own the property(s), and the mortgages will be in the company’s name. Investors often favour SPV companies as they operate as separate legal entities and personal assets are safeguarded against potential financial losses incurred by the SPV company.

An SPV company can often be beneficial for higher-rate taxpayers as buy-to-let mortgage interest payments and other finance costs can be deducted as a business expense and used to reduce the Corporation Tax bill. Private landlords are no longer able to deduct mortgage interest against rental income, which could significantly increase their tax bill.

Which structure should I choose?

Although there are many different ways to set up a property investment business and manage your buy-to-let portfolio, the most commonly used structures in the UK are to invest as an individual, set up an LLP or via a limited company. You must weigh the benefits of each structure and base your decision on the structure that will achieve your goals and ventures.

It is essential to consider how many properties you would ideally like to invest in, whether you are interested in short-term investment to sell a property for profit or are looking for regular income from one or two properties. If you are a higher-rate taxpayer and have a long-term goal of building and expanding your property portfolio, it may be more beneficial to invest through a limited company. In comparison, investing as an individual or as part of an LLP may be more helpful if you aim to earn regular property income.

Have you considered your exit strategy?

For many people considering investing in property, it is often the start of a lifelong career. However, before you begin, it is always important to consider your exit strategy for when you want to retire or perhaps consider a new career path. How you set up your business will have an impact later on when it comes to your exit strategy. If you decide to set up a corporate structure, you must consider how you will withdraw money from the company once the properties are sold. Whereas for properties owned as part of a partnership or individually, all you need to do is pay the capital gains tax due on the sale of the property.

Other factors to consider

Investing in property through a limited company (SPV company) could be a more tax-efficient structure. However, there are essential factors to consider before you settle on that structure. For example, the Annual Tax on Enveloped Dwellings (ATED) is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000. Alongside the additional financial costs of investing in property through a limited company, you may also have reduced lender choice when obtaining a mortgage. If your limited company does not have enough credit history or financial reserves, lenders may also require personal guarantees, increasing your individual risk.

You should also consider how much money and time you are willing to dedicate to your property investment on an ongoing basis. Would you prefer to invest in a property closer to your home to keep running costs down and look after the property yourself? Or are you more interested in investing in a popular and sought-after location that isn’t as accessible and would require you to pay agents to look after and manage the property on your behalf?

We highly recommend you seek professional advice regarding your business plans and circumstances before deciding which structure to adopt when investing in property.

Churchill Knight & Associates Ltd are experts in landlord accountancy

To discuss how to set up and manage your property portfolio, please call our expert team on 01707 871622. You can also schedule a free consultation at a time that suits you. A team member will be in touch to answer your questions or provide further information about our landlord accountancy service.