Property holding companies can be used for different purposes. Some hold property with a view to trade, whether it be to sell or to rent, whilst others use property as premises for their main operations
In this first of a series of articles on property, we will look at implications on a financial perspective for those companies involved in property trade as their principal business activity. We will finish off the series with a final article on those that hold it but use it, rather than sell or rent it out.
What is considered property?
In the context of this article, we will be making reference to “real property” which generally refers to land and all structures integrated with or affixed to that land, such as buildings and any other fixtures that are considered immovable e.g. roads, ponds, fixed machinery, etc .
For accounting and tax purposes, real property is usually classified as land and buildings, with terms such as immovable property or real estate being used interchangeably.
Uses of property holding companies
Determining the main reasons for holding land and buildings is necessary from an accounting and tax perspective as it usually determines how to record transactions in the books in order to comply with generally accepted accounting convention and also stipulated tax rules. The implications for each are explained in more detail in the section below.
Accounting implications for property holding companies
Real estate companies usually have a portfolio of properties that they hold for purposes of selling or renting out. It would make business sense to determine how much these properties are worth with reference to the property market.
If the business is a property buyer or developer with a view to sell, they would want to ensure that the price returns a profit or mark-up on the cost of either buying or constructing. This ensures the business remains viable and continually makes a return on investment. The accounting rules therefore stipulate recording transactions to enable a calculation of whether the sell made a profit a loss on sale.
If on the other hand the property is rented out, similar objectives are at play, and most landlords look at making sure the rental income received at least (but preferably more than) covers the costs such as the mortgage repayments, property management and maintenance, whilst also keeping track of what the value of the property itself is should they decide to sell it.
Either way, the market value of property is important, and most business involve specialists such as qualified property valuers for the market prices, also qualified accountants for guidance on how to record the properties and related transactions in the books to comply with the accounting standards.
Keeping track of the costs is also an important part for accountancy. In the construction world, costs included are costs of the land, and of the materials and labour, and other relevant costs to erect the buildings, and accountants are useful in implementing processes for accuracy of recordings.
Tax implications for property holding companies
Tax residency rules
Generally speaking, tax is attracted on property-related income based on where the property is actually located rather than where the owner is resident. Therefore, if a company is registered in the IOM but has properties in the UK, then any income on renting out or selling is taxed in the UK.
Capital Gains Tax (CGT)
This tax is triggered when property is sold. CGT has been referred to in a number of our articles. Refer to our blogs page https://www.invicta-accounting.com/blog-post/ and make use of our search feature available for specifics on CGT.
Rental income (and UK’s Rent-A-Room Scheme exemption)
Rent received is included as normal income in the profit and loss statement of a business and it is taxed accordingly as part of the taxable income of a business (company or sole trader). Taxable income can of course be reduced by allowable business expenses such as those incurred to run and maintain the property.
For individuals in the UK, one might own a house which they live in and consider their own or main home, and they rent out a room in the house to a lodger. If this is the case, the landlord owner of the house may be exempt from tax under the Rent-A-Room Scheme if the total rental income they receive from the lodger is less than a particular threshold for the year, and if certain criteria relating to private residency, non-office use, supply of furnished rooms, etc are met.
Also note that this scheme is not applicable in the IOM.
Refer to the following link for more details on the UK rent-a-room scheme: https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/hs223-rent-a-room-scheme-2020
Non-resident landlord tax
This tax applies to landlords who live abroad but rent out property in the UK. A tax is payable to HMRC, and this mainly is keeping in line with the tax residency rules on property.
Further information can be found at: https://www.gov.uk/guidance/paying-tax-on-rent-to-landlords-abroad, or consult us for further details.
Invicta can help with Property holding companies?
Invicta has qualified accountants that have a wealth of experience with property holding companies and property-related accounting and tax matters. Contact us for a free consultation to discuss what assistance we can provide regarding any of the matters referred to above or any other areas relating property holding companies.
Contact Invicta today on 01624 672358 or email us: firstname.lastname@example.org