Self-Employed With Broad Business Activities

Pete12

Good morning everyone,

An IT employee with rental income for investment properties wishes to become self-employed as an IT contractor and wants to bring his rental properties into the business ie business activities will be IT, property rental and maintenance.

1) Is this allowable and if so does it mean the profits, losses, expenses of any of the activities are treated fully by HMRC as relating to the same business?

2) Would the CGT implications remain the same for him as he will be a sole-trader (properties remaining "his"/or properties being treated as a business asset - don't know if there is a distinction in this case)?

3) Even if his proposal is allowable by HMRC - are there any reasons why he should not go down this route?

Any help would be greatly appreciated!

Pete12

Monsoon

As he is an individual, the rental income will always be assessed as land and property income, not self employment.

Even if he could bring it all under self employment, there would be no difference to the CGT implications as he is self employeed and thus he is the business.

He could bring it all together in the accounts but would then have to split it out again in the tax return, so there's no point.

clegganator

And if he is an IT Contractor earning what IT Contractors earn he may find himself skipping self employment and going Ltd, if that's something your comfortable with...

Pete12

Monsoon,

Thank you - I had thought along these lines but wondered mainly because - what if there was a loss on the rental income - could this be offset against profits of his IT work and vice versa? Also, there is a chance that he may diversify into property management for others - would such an "odd mix" of activities be allowed as a single business?

Clegganator,

Thank you. Yes I agree...but first things first!

Pete12

JodieR

Pete12 wrote: »

what if there was a loss on the rental income - could this be offset against profits of his IT work and vice versa?
Pete12

If there's a loss on the rental income then this can only be carried forwards to use against future rental profits. If there's a loss on his IT work then yes, it could be set against other income of the same year and this would include rental income.

Either way it needs to be spilt out and shown separately, can't all be lumped together.

PGM

clegganator wrote: »

And if he is an IT Contractor earning what IT Contractors earn he may find himself skipping self employment and going Ltd, if that's something your comfortable with...

Thats the option I was thinking of. How feasible it'd be I'm not sure, the Ltd company would need to buy the houses from him.

Monsoon

PGM wrote: »

the Ltd company would need to buy the houses from him.

Which incurs stamp duty and probably less favourable tax treatment on eventual sale.... pretty much, don't go there, more often than not.

PGM

Monsoon wrote: »

Which incurs stamp duty and probably less favourable tax treatment on eventual sale.... pretty much, don't go there, more often than not.

It doesn't seem a good idea. How would property sales from a Ltd company be treated, taxed on profit, so you'd lose the capital gains allowance?

Monsoon

PGM wrote: »

It doesn't seem a good idea. How would property sales from a Ltd company be treated, taxed on profit, so you'd lose the capital gains allowance?

It's still calculated as a capital gain (in a company: chargeable gain) but no annual allowance, and a company rate of tax.

PGM

Monsoon wrote: »

It's still calculated as a capital gain (in a company: chargeable gain) but no annual allowance, and a company rate of tax.

Thats a big enough reason not to do it. And the risk of losing the houses if something was to happen to the Ltd company.

Pete12

JodieR,

So, losses from IT work could be offset against rental income/profits but not vice versa...what about profits from his proposed property management work (for clients - but not including his own properties which, if I understand it, is considered to be investment rather than earned income)? Sorry to seem like I'm splitting hairs - it's just that I am being presented with a "what if" scenario, which, to be fair, isn't unreasonable I suppose.

Pete12

Monsoon, PGM - thank you as well!

Monsoon

Pete12 wrote: »

what about profits from his proposed property management work (for clients - but not including his own properties which, if I understand it, is considered to be investment rather than earned income)?

That would be fine. Management services to other people are just a trade. He should keep that separate from his own lettings, and his own lettings management.

Pete12

That just about does it - for now anyway.

Thanks all!