The six point rate difference hiding inside a property company
Most small companies pay 19 per cent corporation tax on profits up to £50,000 and get marginal relief above that. A close investment-holding company gets neither, and pays a flat 25 per cent on every pound. Property companies are not caught by holding property. They are caught by who the tenant is, by holding land nobody lets, and sometimes by sitting on cash between investments. The most it can cost is £3,000 a year, and it is usually avoidable.
Start with what a close company is
Almost every owner-managed company in the country is a close company, and the term does most of the work in what follows. Broadly, a company is close if it is under the control of five or fewer participators, or of any number of participators who are also directors. A participator is anyone with a share or interest in the capital or income of the company, so in practice that means the shareholders. A husband and wife company is close. A company owned by three business partners is close. A property company owned by one person is close. The label carries several consequences in the tax code, and since 1 April 2023 one of them has been a rate difference of up to six percentage points that a good many property companies have walked into without noticing.
Two concessions, and the company that gets neither
Corporation tax has a main rate of 25 per cent, a small profits rate of 19 per cent where augmented profits do not exceed GBP 50,000, and marginal relief tapering the effective rate between GBP 50,000 and GBP 250,000. Augmented profits means the company's taxable total profits plus certain exempt distributions from companies it does not control, so dividends received from an unconnected company can push a company over a limit even though those dividends are never themselves taxed. For the financial year 2026 the rates, the limits and the marginal relief fraction of three two-hundredths are unchanged, and the Finance Act 2026 has already set the same figures for the financial year 2027. Section 18A(1)(b) of the Corporation Tax Act 2010 denies the small profits rate to a close investment-holding company, and section 18B(1)(b) separately denies it marginal relief. Both limbs count, and dropping the second is how people conclude that a caught company still gets the taper in the middle band. It does not. It pays 25 per cent flat from the first pound. If you are checking this against another source, look at where the definition is cited from. It used to sit at section 34 of the Corporation Tax Act 2010, repealed in 2014 when the single rate arrived, and the live corporation tax provision is now section 18N. The concept did not lapse in the meantime: the Finance Act 2014 re-enacted it as section 393A of the Income Tax Act 2007, where it still governs whether an individual gets income tax relief on interest on a loan taken out to invest in the company. Between 2015 and 2023 it simply carried no corporation tax consequence, only an income tax one.
The test is about purpose, and the purposes can be combined
A close company is a close investment-holding company in an accounting period unless, throughout that period, it exists wholly or mainly for one or more of the permitted purposes in section 18N(2). Those purposes include carrying on a trade on a commercial basis; making investments in land where the land is, or is intended to be, let commercially; holding shares in and securities of, or making loans to, one or more qualifying companies or companies within section 18N(4); and existing for the purpose of a trade, or of land investment of that kind, carried on by a qualifying company or by a company which has control of the company being tested. A qualifying company, defined at section 18N(6), is one under the control of the company being tested, or under the control of a company which controls it, and which itself exists wholly or mainly for the trading or the commercial letting purpose. Control there takes its meaning from section 450, so this is a control test and not a 51 per cent subsidiary test, and the difference decides real cases. The words one or more matter too, because the purposes can be aggregated: a company that is part trading and part commercial letting sits outside the definition where the two together are wholly or mainly why it exists, even though neither predominates on its own. This is a test of purpose rather than of activity. HMRC accepts in its own guidance that a company's purpose is not necessarily the same as its current activities, and that a company can exist for a trading purpose in a period during which it carries on no trade, though it describes that as exceptional. The test applies throughout the period, so a purpose acquired halfway through does not rescue the whole of it, and while a bare change of purpose does not itself end an accounting period, starting or ceasing to trade does. There is a narrow let-off for the accounting period beginning when a winding up starts, provided the company was not caught in the period immediately before, and it protects that one period only.
The letting limb is a deeming rule, not a test of commerciality
This is where property companies actually fall in, and the drafting is not intuitive. Section 18N(3) provides that a letting is treated as commercial unless the tenant falls within a defined class. A full open market rent, a properly drawn lease and arm's length terms will not save a letting to somebody inside that class, and, read the other way, a soft letting to a stranger is still commercial for this purpose. Everything turns on the identity of the tenant. The class is wider than the director or the shareholder. It covers any person connected with the company within section 1122, which works off control rather than office, and then four layers of family beyond that: the spouse or civil partner of a connected person; a relative of a connected person and that relative's spouse or civil partner; a relative of the spouse or civil partner of a connected person; and the spouse or civil partner of such a relative. Relative for this purpose means only a brother, sister, ancestor or lineal descendant, so uncles, aunts, nephews, nieces and cousins fall outside it. HMRC's own illustration is that letting to a father-in-law spoils the position. A salaried director with no shares and no votes is not connected with the company by virtue of holding office alone, though in an owner-managed company the control tests and the attribution of an associate's rights will usually catch them. That is an analysis to run rather than assume.
What it actually costs
The following figures assume a twelve month accounting period, no associated companies and no exempt distributions, and are given to show the shape of the cost rather than to describe anybody's affairs. At profits of GBP 40,000 an ordinary company pays 19 per cent, or GBP 7,600, and a caught company pays 25 per cent, or GBP 10,000. The gap is GBP 2,400, the full six percentage points. At GBP 50,000 the figures are GBP 9,500 and GBP 12,500, a gap of GBP 3,000, and that is the maximum, reached exactly at the lower limit. Above GBP 50,000 the gap narrows, because what is being lost is only the marginal relief. At GBP 100,000 an ordinary company pays GBP 25,000 less relief of GBP 2,250, so GBP 22,750, against a flat GBP 25,000, a difference of GBP 2,250. At GBP 150,000 the difference is GBP 1,500. At GBP 250,000 it is nil, and above that figure the status costs nothing at all. Buried in that arithmetic is a point worth knowing if profits sit inside the band. Below the lower limit the six points are both the average gap and the gap on each additional pound of profit. Inside the band they are neither, because there the ordinary company is losing marginal relief as profits rise and pays 26.5 per cent on the next pound, while the caught company pays a flat 25 per cent. So in the middle band the caught company pays more tax overall and less on each additional pound. Associated companies scale everything down: with two associates the lower limit falls to GBP 16,667 and the maximum cost falls to GBP 1,000.
Four patterns that catch property companies
The commonest by far is the property company that owns the premises its owner's trading company occupies. Common control by the same individual makes the two companies connected, so the letting is not treated as commercial. The route that would otherwise rescue it usually fails too, because section 18N(6) requires the trading company to be under the control of the property company or of a company which controls the property company, and control by a shared individual shareholder does not qualify. Insert a holding company above both and the position changes: the trading company is then controlled by a company which controls the property company, so it becomes a qualifying company, and the property company can exist for the permitted purpose in section 18N(2)(f), the purpose of a trade carried on commercially by a qualifying company. Leave the two in direct personal ownership and none of that is available. Be careful with HMRC's guidance here, because it still sets the permitted purposes out in their pre-2021 order, in which this one was lettered differently. The second pattern is the company owning a property that the owner or a family member lives in or uses, which fails the letting limb for the same reason. The third catches people who would never call themselves investors in anything: land held purely for capital appreciation, with no letting and no intention to let, is not within the land limb at all, because that limb requires the land to be, or to be intended to be, let. A company holding development land, amenity land or a strategic site and nothing else is caught, however unambiguously it is a property company in ordinary speech. The fourth is the company sitting on cash between investments after a sale. HMRC will normally treat a close company holding nothing but bank deposits as caught, and this is the one place where the purpose test can genuinely bite in the taxpayer's favour, because the question is what the company exists for rather than what it is currently doing. What decides a case of that kind is contemporaneous evidence: board minutes, agents' particulars, offers actually made. Intention reconstructed afterwards is worth very little, and there is no reported decision that does the work for you.
What the status does not change, and the date in April 2027
The label sounds more serious than its consequences, so it is worth marking the boundaries. Close investment-holding company status changes the corporation tax rate and, through section 393A of the Income Tax Act 2007, an individual shareholder's relief for interest on a loan to invest in the company. It does nothing else in the mainstream code. It does not affect the charge on loans to participators, which applies to every close company and rose to 35.75 per cent for loans made on or after 6 April 2026 in step with the dividend upper rate. It does not affect quarterly instalment payment thresholds, the associated company rules, research and development relief, the patent box or audit exemption. Nor does the status necessarily make the company an associated company of anyone else, because those are different tests with opposite consequences: a close company holding only cash may be caught by the rate rule and yet not be carrying on a business at all, in which case it is left out of every other group member's associated company count. Two dates to have in mind. Nothing in the Finance Acts of 2024, 2025 or 2026 amended these provisions, and the rate, the limits and the fraction are fixed to 31 March 2028. Separately, the Finance Act 2026 has set new property rates of income tax of 22, 42 and 47 per cent for the tax year 2027 to 2028. Those rates are set for that year alone, because the same Act inserts a provision requiring Parliament to determine the property rates for each tax year, so nothing beyond 2027 to 2028 is yet law. Against the main rates currently in force they sit two percentage points higher, which widens the differential between holding let property personally and holding it in a company from 6 April 2027. That makes this a good year to establish, in writing, which side of section 18N a property company sits on, before the question is asked with more money attached to it. Three things settle it for most companies: who the tenants are and whether any of them is connected or within those four family layers; whether there is land in the company that is neither let nor intended to be let, since that asset carries the risk on its own; and, if the answer to either is uncomfortable, whether the cure is a change of tenant, a holding company, or simply accepting the cost as the price of a structure that is right for other reasons. At no more than GBP 3,000 a year the last of those is often the correct answer. What is never correct is discovering the point in an enquiry.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.