I am considering purchasing my next property inside a limited company (SPV) as this fits with my longer-term property investment objectives. However, in the short term (2-3 years) I may need to let the property to a ‘connected person’, which I believe has tax implications. What tax reliefs can and cannot be used during the short-term period, are there additional taxes to consider, and when returning to a full rate ‘arms-length’ letting, are there any taxation ‘hangovers’ from the former period to consider? Property value is £200,000.
Arthur Weller replies:
Since the property value is £200,000 it is not within the annual tax on enveloped dwellings regime. If the property is rented out to the connected person at the full rate, on an arms’ length basis, then there are no additional tax considerations to consider. If it is rented out to the connected person at below the market rate, then there will be a tax charge on the director/shareholder. (There is also a restriction of loss relief when the property is rented out at non-commercial rates, per PIM2220 Properties not let at a commercial rent.) When the initial period is over and the property returns to renting to a non-connected person, there are no hangover implications.
This question was first printed in Tax Insider in November 2017.