Property and UK Tax (Part 4)
This week, it’s time to think about how to structure our companies and also about SIC codes (or Standard Industrial Classification) for our property businesses.
Firstly, let’s think about how to structure our business if we are to undertake various property activities. You might wonder if we could have just one company and within that company hold some properties for buy-to-lets as well as properties to flip or trade.
The answer is yes, we can. We don’t have to necessarily set up a separate company for each of our different activities. However, let’s think for a moment about SIC codes – in other words, the classification of the company used at Companies House.
If you take a look at Companies House, you’ll notice that if you scan the details of different companies, they all have a SIC code and this code describes the activity of the company. You’ll also notice that some companies have more than one SIC code – as it happens, it’s technically possible to have four SIC codes per company.
So, you might be questioning if you should have a company with all four SIC codes to cover all bases.
In my opinion, the real question to ask is should you be doing all of those activities through one company? I would say that with the shift in the tax landscape, the answer is probably no.
Many years back when I set up my limited company, I set up only one company and operated all of my property activities through that one company. But whilst it hasn’t caused me any issues to date, going forward (especially with the recent changes to UK tax), I could find myself with a few problems.
For this reason, I contacted my accountant for advice. I asked him what the implications nowadays would be of holding AND trading properties in the same company. His response was quite detailed, (you can take a look at his full reply below), but in essence, he did advise me to separate the activities out. I find his advice to be wise and have taken steps to get the ball rolling.
This brings me to the subject of SIC codes. SIC codes only really come into play when you do the company’s first set of accounts, but let’s think about which codes relate to property businesses.
Really, there are only four different SIC codes that will apply to those in property. They are as follows:
- 68100 is for the buying and selling of own real estate; so, for flipping and trading.
- 68209 is for the letting and operating of own or leased real estate, i.e. for buying and holding property and renting it out.
- 68320 is for the management of real estate on a fee or contract basis. So, if you’re going to set up your own management company.
- 68310 is for real estate agencies, in other words, if you’re going to do deal packaging and are going to source properties for other people.
SIC codes are important because they effectively tell Companies House what you’re going to be doing from a tax point of view. Not only that, but they are also important to lenders. A SIC code lets a lender know what activity a limited company is going to be undertaking, and this plays a role in their decision whether to lend to you or not.
As such, before it comes time to file your accounts, give some thought to which SIC code is right for you and for your overall property strategy.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to:
REPLY FROM THE ACCOUNTANT:
It isn’t a problem to have two SIC codes or two activities for Companies House.
The main consideration here is extracting funds from the company once it has finished its activities. Trading in properties (i.e. buying with a view to selling on/flipping) qualifies as a trade, which is more advantageous than investing.
The main benefit to having a trade is Capital Gains Tax. Principally, if you sold the company or wound up the company to take out the funds then you can qualify for Entrepreneurs Relief on the gain. This is effectively Capital Gains Tax – at 10%. Entrepreneurs Relief can be compromised if the company has more than 20% of its wealth in investment assets / receives more than 20% of its income from / dedicates more than 20% of its time to investment assets.
There is a big caveat to this – it is potentially dangerous to develop a site to then wind up the company (extracting funds under Entrepreneurs Relief) to then develop another site and then wind up… and so on.
This is a complex new rule; however, if you wind up a company and extract funds – these are treated as dividends if: –
- You wind up the company in order to pay less tax (Entrepreneurs Relief vs a dividend) and
- Start another company (or continue running a company) doing the same thing within two years.
Therefore, there must be a significant non-tax reason for winding up a company.
If you intend to run a development company until its natural end, this rule will not be an issue.
Therefore, in my view it is advantageous to keep trade and investment separate.
There are other reasons (inheritance tax, gift relief for capital gains) as well.
Please do not hesitate to call if you wish to discuss further.