Property Business – What SIC code should I use for my property Company ?

A SIC code stands for Standard Industrial Classification code, and classifies your business activity at Companies House. SIC code for a company can be changed at any time and be amended when you file your next  Confirmation Statement. While forming a company to run your property business, you will be asked to provide SIC code which closely describes your business activities. There are various reasons to choose an appropriate SIC code so as to avoid any complexities later on with tax authorities and Lenders.

Practically, there are only four: 68100, 68209, 68320 and 68310, and here’s a brief explanation of their classification.

  1. SIC code 68100 is for the buying and selling of own real estate; so, if you’re going to be flipping and trading, this would be the code for you. So if you intend to buy properties to resell, then this is the appropriate SIC code.

2.    SIC code 68209 is for the letting and operating of own or leased real estate. In other words, for buying and holding property and renting it out.      So if you are buying a property to hold as an investment (single BTLs or HMOs) or if you are using Rent to Rent strategy this will be the SIC code for  your company.

 

  1. SIC code 68320 is for the management of real estate on a fee or contract basis. So, for example if you’re going to set up your own management company, then this would be the right classification for you.

 

  1. SIC code 68310 is for real estate agencies. So, for all the deal sourcers/packagers who act as an agent for investors.

As you can see, these codes effectively tell Companies House what a business is going to be doing from a tax point of view. You can choose up to a maximum of four SIC codes for one company. SIC codes also play a crucial role with lenders/Finance providers – again, these codes let lenders know what activity a property company is going to undertake, and will help lenders assess whether they want to lend to you or not.There are issues however with having multiple property activities running through the same company, and it would be wise to seek professional advice to ensure your company structure is correct and efficient from the outset, with particular consideration to Capital Gain Tax and business property relief.

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Do you have a second home? You might want to sell up before April 2020!

Private residence relief and the final period exemption

From a capital gains tax perspective, there are significant tax savings to be had if a property has been the owner’s only or main residence. The main gains are where the property has been the only or main residence throughout the whole period of ownership as private residence relief applies in full to shelter any gain arising on the disposal of the property from capital gains tax.

However, there are also advantages if a property enjoys only or main residence status for part of the ownership period; not only are any gains relating to that period sheltered from capital gains tax, but those covered by the final period exemption are also tax-free.

The final period exemption works to shelter any gain arising in the final period of ownership from capital gains tax if the property has at any time, however briefly, been the owner’s only or main residence. This can be particularly useful if the property is, say, lived in as a main home and then let out prior to being sold, or where a person has two or more residences.

Prior to 6 April 2020, the final period exemption applies generally to the last 18 months of ownership. Where the person making the disposal is a disabled person or a long-term resident in a care home, the final period exemption applies to the last 36 months of ownership.

From 6 April 2020, the final period exemption is reduced to nine months, although it will remain at 36 months for care home residents and disabled persons.

Planning ahead

Where a property which has been occupied as a main residence at some point, it could be very advantageous to dispose of it prior to 6 April 2020 rather than after that date to benefit from the longer final period exemption.

Example

Frankie has a cottage on the coast that he brought on 1 January 2010 for £200,000. He lived in it as his main residence for two years until 31 December 2011, when he purchased a city flat which has been his main residence since that date. He continues to use the cottage as a holiday home.

He plans to sell the cottage and expects to get £320,000.

Scenario 1 – sale on 31 March 2020

If Frankie sells the cottage on 31 March 2020, he will have owned the cottage for a total of 10 years and three months (123 months). Of that period, he lived in it for 24 months as his only or main residence. As the sale takes place prior to 6 April 2020, he will benefit from the final period exemption for the last 18 months.

The gain on sale is £120,000 (£320,000 – £200,000)

He qualifies for 42 months’ private residence relief, which is worth £40,976 (42/123 x £120,000).

The chargeable gain is therefore £79,024 (£120,000 – £40,976).

Scenario 2 – sale on 30 April 2020

If Frankie does not sell the property until 30 April 2020, he will only benefit from a nine-month final period exemption. If he sells on this date, he will have owned the property for 124 months. Assuming the sale price remains at £320,000 and the gain at £120,000, the gain which is sheltered by private residence relief is £31,935 (33/124 x £120,000), and the chargeable gain is increased to £88,065 (£120,000 – £31,935).

If planning to dispose of a property which has been an only or main residence for some but not all of the period of ownership, selling prior to 6 April 2020 will enable the owner to shelter the gain pertaining to the last 18 months of ownership.

Partner note: TCGA 1992, s. 223; Draft legislation for inclusion in Finance Bill 2019—20 (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816196/Changes_to_ancillary_reliefs_in_Capital_Gains_Tax_Private_Residence_Relief_-_Draft_legislation.pdf).

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Do you spend more than 6 months of the year outside the UK? Make sure you’re compliant

Non-residents landlord scheme

A non-resident landlord is a landlord who lets out property in the UK but spends more than six months in the tax year outside the UK. A special tax scheme – the non-residents landlord scheme – applies to these landlords. Under the scheme, tax must be deducted by a letting agent or tenant from the rent paid to the non-resident landlord and paid over to HMRC.

Tenants

A tenant falls within the NRL scheme where the landlord is a non-resident landlord and the rent paid to the landlord is more than £100 a week. Where the rent is less than £100 a week (£5,200 a year), the tenant is not required to deduct tax from the rent (unless told to do so by HMRC). The tenant is also relieved of the obligation to deduct tax if HMRC have notified the tenant in writing that the landlord can receive the rent without tax being deducted; however the tenant must still register with HMRC and complete an annual return.

Where the tenant pays rent to a letting agent, it is the letting agent rather than the tenant who must operate the scheme.

Letting agents

Letting agents must also operate the NRL scheme where they collect rent on behalf of a non-resident landlord, regardless of how much rent they collect (unless HMRC have informed the letting agent in writing that the landlord can receive the rent without tax being deducted).

A letting agent is someone who helps the landlord run their business, receives rent on their behalf or controls where it goes and who usually lives in the UK.

Complying with the scheme

To comply with the scheme, tenants and letting agents must

  • register with the HMRC Charity, Savings and International department within 30 days of the date on which they are first required to operate the scheme– letting agents should use form NRL4i and tenants should write to HMRC
  • work out the tax to be deducted each quarter
  • send quarterly payments of tax deducted to HMRC Accounts Office, Shipley
  • send a report to HMRC and the landlord by 5 July after the end of the tax year on form NRLY
  • provide the non-resident landlord with a certificate of tax deducted each year (on form NRL6)
  • keep records for four years to show that they have complied with the scheme

Calculating the tax

Tax should be calculated on a quarterly basis on:

  • any rental income paid to the landlord in the quarter
  • any payments that they make in the quarter to third parties which are not ‘deductible payments’

Deductible payments are those that the tenant or letting agent can be ‘reasonably satisfied’ will be deductible in computing the profits of the landlord’s property rental business. Reassuringly, in their guidance, HMRC state that they ‘do not expect letting agents and tenants to be tax experts’.

The quarters run to 30 June, 30 September, 31 December and 31 March. The tax deducted must be paid over to HMRC within 30 days of the end of the quarter.

The non-resident landlord

The non-resident landlord can set the tax deducted under the scheme against that payable on the profits of his or her property rental business. Partner note: The Taxation of Income from Land (Non-residents) Regulations 1995 (SI 1995/2002).

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A quick guide to what should be included when calculating the profit or loss for a property rental business.

Property income receipts – what should be included?

When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts

Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.

Deposits

The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.

Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.

Jointly-owned property

Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.

Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.

Overseas rental properties

Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.

Furnished holiday lettings

Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.

Getting it right

Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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A quick guide on how to manage costs and expenses as a work from home landlord

Managing a rental business from home

A landlord will often manage their property rental business from home, and in doing so will incur additional household expenses, such as additional electricity and gas, additional cleaning costs, etc. As with other expenses, the landlord can claim a deduction for these when working out the profits of the rental business.

Most unincorporated landlords will now prepare accounts on the cash basis.

Wholly and exclusively incurred

The basic rule for an expense to be deductible in computing the profits of a rental business is that the expenses relate wholly and exclusively to that business. This applies equally to a deduction for household expenses – they can be claimed where they relate wholly and exclusively to the rental business.

Actual costs

Where the expenses are wholly and necessarily incurred, a deduction can simply be claimed for the actual expenses. In reality, this will take some working out as household bills will not be split between personal and business expenses. Any reasonable basis of apportionment can be used – such as floor area, number of rooms, hours spent etc. Records should be kept, together with the basis of calculation.

Simplified expenses

Where a landlord spends more than 25 hours a month managing the business from home, the simplified expenses system can be used to work out the deduction for the additional costs of working from home. The expenses depend on the number of hours worked in the home each month, and the deduction is a flat monthly amount, as shown in the table below.

Hours of business use per month Flat rate per month
25 to 50 hours £10
51 to 100 hours £18
101 hours or more £26

The hours are the total hours worked at the home by anyone in the property rental business.

Example

Nadeem runs his property rental business from home. In 2018/19, he spends 60 hours a month working on the business in all months except August and December, in respect of which he spends 30 hours in each on those months working on the business.

For 2018/19 he is able to claim a deduction of £200 for expenses of running his business from home (10 months @ £18 plus 2 months @ £10).

The simplified expenses rule does not cover telephone and internet, which can be claimed in addition to the deduction for simplified expenses.

Partner note: ITTOIA 2003, Pt. Ch. 5A, Pt. 3

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