Close Investment Holding Companies (CIHCs)
Recent changes in tax rules have, once again, made Close Investment Holding Companies (CIHCs) a hot topic for businesses and accountants. Read on to make sense of these new rules and how they might impact your company.
15th January 2024
Clive Barron See profile
A company that is a CIHC has to pay Corporation Tax at the higher 25% rate on all of its taxable profits arising on or after 1 April 2023.
Between 1 April 2015 and 31 March 2023, the UK had one single rate of Corporation Tax – 19%. Whilst the CIHC rules have continued to exist during this time, they have had no practical application in relation to the rate of Corporation Tax applying to company profits. They have continued to exist, for example, to prevent individuals who have borrowed to invest or lend money to a CIHC from claiming Income Tax relief on interest incurred.
From 1 April 2023, two rates of Corporation Tax apply: 19% on taxable profits below £50,000; and 25% on taxable profits above £250,000. Companies with taxable profits between £50,000 and £250,000 pay Corporation Tax at 25% but with the benefit of marginal relief.
For certain companies with profits of £50,000 or less, the introduction of the 25% rate of Corporation Tax rate brings the CIHC rules back into focus. Companies which are classified as CIHCs will pay 6 pence per pound more in Corporation Tax on their entire taxable profits, where those profits relate to an accounting period commencing on or after 1 April 2023, or are treated as arising from 1 April in any accounting period which straddles 1 April 2023.
For a company to be a CIHC, it must first be a ‘Close Company’. This is one which is controlled by any number of participators who are directors or one which is controlled by five or fewer participators. ‘Control’ for this purpose is a 51% test, measured by various tests which are widely drawn, but these include the holding of company shares, shareholder votes, or rights on a company’s winding up.
If a company is close, the presumption is that it will be a CIHC unless it is excluded because it exists wholly or mainly for one of the following permitted purposes:
Being a Trading Company: Carrying on a trade on a commercial basis (no restriction on the type of trade).
Being a Property Investment Company: Letting of land and buildings to unconnected third parties (no letting to connected persons).
Acting as a Holding Company or Service Company within a group, where the group exists wholly or mainly to trade, or invest in land for letting to unconnected third parties.
Acting as an administrative co-ordinator to two or more qualifying companies.
The company in question is referred to as ‘the candidate company’. Let’s break down these exemptions further:
Trading Companies: To be excluded under this heading the trade must be undertaken on a commercial basis. There is no restriction on the type of trade.
Property Investment Companies:
To be excluded under this category, property owned by the candidate company cannot be let to a “person” who is connected with the company.
Broadly speaking, an individual will be connected with a company if that person has control of it, or if that person and persons connected with him (whether they be individuals or companies) have control of it.
Control means the ability to ensure that the affairs of a company are carried out according to a person’s wishes, whether that be by holding the greatest number of shares, voting rights, or as a result of powers given by the company’s articles of association or other document(s) regulating the company.
Where an individual (X) is connected with the company, property cannot be let to X or:
- The spouse or civil partner of X
- A relative of X (lineal ancestor or descendent and siblings)
- Spouse or civil partner of a relative*
- A relative of the spouse or civil partner of X
- The spouse or civil partner of a relative of the spouse or civil partner of X.
*Relative means a brother, sister, ancestor, or lineal descendant.
The term ‘person’ referred to above can include companies as well as individuals. So, if a company lets property to another company that is connected, that can make it a CIHC, in just the same way as letting to a connected individual can.
Group holding or group-finance company:
To be exempted under this category, broadly speaking, the company must exist for the purpose of holding shares and/or securities or making loans to, one or more companies, each of which it controls AND those controlled companies exist wholly or mainly for one of the aforementioned permitted purposes.
The main effect of this category is to exclude from being a CIHC, the holding company of a trading group or a property investment group, even where the group consists only of the holding company and one trading or property investment subsidiary.
Administrative co-ordination: To be exempted under this category the company must exist wholly or mainly for the purpose of co-ordinating the administration of two or more companies which it controls AND those controlled companies exist wholly or mainly for one of the aforementioned permitted purposes.
The majority of companies will exist wholly or mainly for a permitted purpose and so would not be classified as a CIHC, i.e. they are either trading companies, or holding investment property, which is let on commercial terms to unconnected parties or holding companies of the same.
Where the rules may have impact is in the context of Family Investment Companies (FICs), which have been popular in recent years as an alternative to a more traditional trust model.
It is not unusual for a FIC to hold portfolio investments (e.g. stocks and shares), or perhaps a property which the family can access. These types of companies would likely not exist wholly or mainly for a permitted purpose, under the CIHC rules, and if that were the case, taxable profits would attract a Corporation Tax charge of 25%, regardless of the level of profit made.