How the UK Budget 2025 Affects Family Investment Companies in the Rental Business

The UK Budget 2025 brings important changes that will impact family investment companies (FICs) involved in the rental property market. For many families using FICs to manage rental income and property investments, understanding these changes is crucial. This post explains the key points of the budget, how they affect FICs in the rental business, and what steps families can take to adapt.

UK residential rental property with multiple units

What Are Family Investment Companies and Why They Matter in Rental Business

Family investment companies are private companies set up by families to hold and manage investments, including rental properties. They offer a way to keep control within the family while benefiting from corporate tax treatment. Many families use FICs to:

• Hold rental properties

• Manage rental income

• Pass wealth to future generations efficiently

  
  

FICs can provide tax advantages compared to personal ownership, such as lower corporation tax rates and more control over income distribution.

Key Changes in the UK Budget 2025 Affecting FICs

The 2025 budget introduces several measures that directly affect how FICs operate in the rental sector. These changes focus on taxation, reliefs, and reporting requirements.

Corporation Tax Rate Adjustments

The corporation tax rate remains a critical factor for FICs. The budget confirms the continuation of the main rate at 25% for companies with profits over £250,000. For smaller companies with profits under £50,000, the rate stays at 19%, with a tapered rate for profits in between.

Impact:

FICs with rental profits above £250,000 will face a higher tax rate, reducing net income available for distribution. Families need to review profit levels and consider strategies to manage taxable profits.

Restrictions on Interest Deductibility

The budget tightens rules on the deductibility of interest expenses for rental businesses operating through companies. This follows earlier restrictions but now applies more strictly to FICs.

Impact:

Interest on loans taken by FICs to buy or maintain rental properties may no longer be fully deductible against rental income. This increases taxable profits and the corporation tax bill.

Changes to Dividend Taxation

Dividend taxation rules for shareholders of FICs also see updates. The dividend allowance is reduced, and higher rates apply to dividend income.

Impact:

Family members receiving dividends from the FIC will pay more tax on their income, affecting overall returns from rental investments.

Capital Gains Tax and Property Disposal

The budget introduces new reporting requirements and potential tax changes on capital gains arising from property sales by companies.

Impact:

FICs selling rental properties must prepare for more detailed reporting and possibly higher tax liabilities on gains.

Practical Steps for Families Using FICs in Rental Business

Families managing rental properties through FICs should take proactive steps to adapt to the new budget rules.

Review Loan Structures and Financing

Since interest deductibility is restricted, families should:

• Assess existing loans and their terms

• Consider alternative financing methods, such as equity injections

• Explore refinancing options to reduce interest costs

  
  

Manage Rental Profits to Optimize Tax Rates

Families can explore ways to keep profits within lower tax bands by:

• Timing expenses and maintenance costs

• Using available reliefs and allowances

• Considering profit distribution strategies within the company

  
  

Plan Dividend Payments Carefully

With dividend tax changes, families should:

• Review dividend payment schedules

• Balance dividends with salaries or other income forms

• Use tax-efficient planning to minimize personal tax liabilities

  
  

Prepare for Capital Gains Reporting

FICs should:

• Keep detailed records of property purchases and sales

• Work with tax advisors to understand new reporting requirements

• Plan property disposals with tax implications in mind

  
  

Case Example: The Smith Family’s Rental FIC

The Smith family owns a family investment company holding five rental properties. Before the 2025 budget, their FIC paid corporation tax at 19% because profits were under £50,000. They financed properties with loans and deducted interest fully.

After the budget:

• Their profits rose above £50,000, pushing them into the 25% tax bracket.

• Interest deductibility was limited, increasing taxable profits.

• Dividend tax changes meant family members paid more on income received.

  
  

The Smiths worked with their accountant to:

• Refinance some loans to reduce interest costs

• Delay some rental income recognition to manage profits

• Adjust dividend payments to balance tax impact

  
  

This planning helped them reduce the overall tax increase and maintain cash flow.

What Families Should Do Next

Families using FICs for rental properties should:

• Consult with tax professionals to understand specific impacts

• Review company financials and tax positions regularly

• Update company structures and financing as needed

• Stay informed about further tax changes and compliance rules

  
  

The UK Budget 2025 creates challenges but also opportunities for families to optimize their rental investments through careful planning.