Over the past few weeks we’ve been thinking about how to structure our property businesses and this week we’re going to think about whether we should separate our activities into different companies and why.
I’m often asked by investors if they should have just one company and within that company hold some properties for buy-to-lets as well as properties to flip or trade. Whilst it is, of course, technically possible to do this, we need to give some thought to SIC codes and Companies House.
When taking a look at Companies House, you can see that each company has between one and a maximum of four SIC codes. These codes describe the activity of the company. As a result, you may ask yourself if your company should have more than one SIC code – this would mean that your company would be undertaking various different activities within the same company.
But is this the right thing to do? Well, with the changes in the tax landscape of late, I would probably say no.
I set up my limited company many years back when the panorama was very different, and have since bought and held properties as well as traded properties through this same company. But whilst it hasn’t caused me any issues to date, I am likely to come up against problems in the future.
With this in mind I contacted my accountant to ask for advice. I wanted to know what the implications would be today of holding AND trading properties in the same company. His response was quite detailed, but in essence, he advised me to separate my property activities out. Of course, I have taken heed of his advice – and this leads me onto the subject of SIC codes.
SIC codes really only come into play when a company is submitting its first set of accounts, but they are important so let’s give some thought to which codes relate to property businesses. Really, there are only four: 68100, 68209, 68320 and 68310, and here’s a brief description of their classification.
- 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.
- 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.
- 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. (As an aside, if you’re going to manage properties for other people or third parties, you should definitely do this in a separate company, and for tax efficiency purposes, you may also consider managing your own properties for yourself but through a separate company).
- SIC code 68310 is for real estate agencies. In other words, if you’re going to do deal packaging, i.e. if you’re going to source properties for other people.
As you can see, these codes effectively tell Companies House what a business is going to be doing from a tax point of view. (By the way, if you’re going to set up a company with those SIC codes, then that’s the activity that the company has to do – it’s unwise to do otherwise).
SIC codes also play an important role with lenders – again, these codes let lenders know what activity a limited company is going to undertake, and will help lenders assess whether they want to lend to you or not.
In a few of my previous blogs posts I discussed SPVs and explained that when you set up a limited company and approach a lender, the lender will primarily look at you. They will look at whether you are “lendable”, will look at the SIC code of your company, and will then assess whether you and your business activity are a safe bet. So, SIC codes are not only important from a tax point of view, but they also play an important role in obtaining finance for your business.
Peter Jones B.Sc FRICS
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