Welcome to our monthly newsletter for property landlords. We hope you find this informative and please contact us to discuss any matters further.
Is a Family Investment Company (FIC) for me?
Family Investment Companies (FICs) are private limited companies in which all shareholders are members of the same family.
In most cases, the directors are the parents and the shareholders are the children, however, an FIC can be any variation of generations within the same family.
FICs are particularly beneficial for Inheritance Tax (IHT). UK residents are subject to a 40% Inheritance Tax on their estate, but with an FIC, you can significantly reduce the amount of tax owed.
For example, if you set up an FIC and gift shares to your children, they will not have to pay Inheritance Tax on their shares if you live for 7 years after establishing the company. Essentially, assets, including property, can be passed through generations, while retaining control.
While this is a fairly straightforward example, FIC transactions can become very complex. It’s also important to issue the correct types of shares. Please contact us if you would like to know more about starting a Family Investment Company.
What about the downsides?
The only possible downside of setting up an FIC is that the individual extracting profits from the business will incur tax, although this will be significantly less than 40%.
Will the 12.5% VAT rate affect my business?
Due to the pandemic, the government slashed the VAT rate for hospitality businesses from 20% to 5% in July 2020. Now that the economy is opening back up, they have introduced a new 12.5% rate to be in place from 1 October 2021 to 31 March 2022. From April 2022, the standard 20% rate will be restored for most hospitality sales.
The 12.5% VAT rate will apply to overnight accommodation, food and drink sales (excluding alcohol) and admission fees to tourist attractions. Therefore, if you own a Furnished Holiday Let, for example, your business will have to account for a higher rate of VAT.
This is the first time the UK has had 4 VAT rates since VAT was introduced in 1973. Therefore, it’s extremely important to check each of your sales and expense invoices carefully, ensuring that tax is claimed at the correct rate.
It would also be beneficial to check if your business can make use of the Flat Rate Scheme (FRS). This is a scheme designed to simplify VAT reporting for small businesses with a VAT turnover of less than £150,000.
Under the FRS, rather than calculating and paying the exact amount of tax from the quarter, you’ll instead pay a fixed percentage of your annual turnover. Fewer calculations and less fuss.
Flat Rate Scheme VAT increase
If your business is currently using the Flat Rate Scheme, or you’re thinking about joining, the new hospitality VAT rate has also affected the VAT flat rates for hospitality businesses.
Prior to the pandemic, hotel and accommodation businesses paid a VAT flat rate of 10.5% of their annual taxable turnover.
During the pandemic from July 2020 to September 2021, the government set the flat rate to 0% as a way of reducing the financial burden on the businesses most affected by lockdowns and travel restrictions.
Similar to the introduction of the 12.5% VAT rate for hospitality businesses, the flat rate has been adjusted from 0% to 5.5% from 1 October 2021 to 31 March 2022 as a way of easing back into normality.
The rate is expected to return to the pre-pandemic rate of 10.5% from April 2022 onwards.
Stamp Duty Land Tax holiday has ended
Stamp Duty Land Tax (SDLT) is a tax due on the purchase of property over £125,000 in England and Northern Ireland. The amount you pay depends on if you’re a first-time buyer, your residential status, if you own other properties and if the property will be used for residential or commercial use
The UK Government introduced a number of coronavirus support schemes for property buyers, including the SDLT Holiday – a relief on tax payable for residential purchases.
The SDLT holiday meant that buyers of residential property up to £500,000 (£250,000 between July and September 2021) did not have to pay any SDLT, saving them up to £15,000.
From 1 October 2021, the SDLT holiday has ended and returned back to the pre-pandemic tax rates.
HMRC offers an SDLT calculator on their website, so you can calculate the exact amount you will owe.
Finance Cost Allowance for Residential Letting
Finance costs are any costs involved in borrowing money to purchase or build assets. Finance costs for residential landlords include mortgage interest, loan interest to furnish the property and any fees incurred when taking out or repaying a mortgage or loan.
From April 2017, the government gradually restricted relief on finance costs for residential properties with the aim of replacing it with the basic 20% rate of Income Tax.
This means that residential landlords will no longer be able to deduct all of their costs from their property income, ensuring that landlords with high incomes no longer receive the most generous tax breaks, making the tax system fairer.
Going forward, individuals can claim a 20% deduction from their Income Tax liability for the sum of finance costs that were not deducted when calculating the profit. Any unused costs can be carried forward to the next tax year.