Connected Parties

When a property investment company rents out property to connected parties, it means they are dealing with individuals or entities that have a close relationship with the company. These connections can include:

1. Shareholders or directors of the company.

2. Relatives of shareholders or directors.

3. Other companies in which the same shareholders or directors have significant control.

Transactions between connected parties are closely scrutinized by tax authorities to prevent tax avoidance or manipulation.

Tax Avoidance Concerns

The tax system aims to ensure fairness and prevent abuse. Companies might try to manipulate their tax liability by renting property to connected parties at artificially low or high rates.

To prevent tax avoidance, tax laws impose specific rules on transactions between connected parties.

Transfer Pricing Rules

Transfer pricing rules apply to transactions between connected parties. These rules ensure that transactions are conducted at arm's length—meaning the same terms as if the parties were unrelated.

For rental agreements, this means the rent charged should be similar to what an independent third party would pay for similar property.

Corporation Tax Implications

If a property investment company rents out property to connected parties at below market rates, it could result in artificially reduced profits for the company.

To prevent this, tax laws treat such transactions as if they were conducted at market rates. Therefore, the company is taxed on the notional market rent rather than the actual rent received.

This ensures that the company pays corporation tax based on a fair assessment of its profits.

Avoiding Tax Evasion

By subjecting property investment companies to the full rate of corporation tax, tax authorities aim to prevent tax evasion.

If companies could freely manipulate transactions with connected parties, they might avoid paying their fair share of taxes.