A close investment-holding company (CIHC) pays corporation tax at the 25% main rate on all its profits with no access to the small profits rate (19%) and no benefit from marginal relief in the £50,000 to £250,000 augmented profits band. The CIHC concept was reintroduced into the corporation tax rate structure by Finance Act 2022 with effect from 1 April 2023, alongside the rate split itself. For property landlords with three to seven properties generating £30,000 to £80,000 of profit per company per year, CIHC status costs around 6 percentage points of tax on profits in the marginal band.

The widespread misconception is that any property investment company must be a CIHC because its income is rental income, and rental is investment activity. Section 18N of the Corporation Tax Act 2010 specifically provides for a carve-out: a close company is not a CIHC where it exists wholly or mainly for the purpose of making investments in land in cases where the land is, or is intended to be, let to persons other than persons connected with the relevant company. A standard arm's-length BTL SPV is squarely inside that carve-out and is not a CIHC. The trap is the connected-person let.

This page walks through the close-company precondition, the qualifying-purpose carve-out in detail, the section 1122 connected-person definition that determines who counts as connected, three worked examples on the boundary between CIHC and non-CIHC, and the consequences for corporation tax and (separately) inheritance tax. For the wider corporation tax rate context including the marginal relief mechanics, see our marginal relief mechanics guide. For how loans-to-participators (section 455) work alongside (and independently of) CIHC status, see our director's loan account mechanics guide.

The close-company precondition

A company is a close company under section 439 CTA 2010 where it is UK-resident and either:

  • Controlled by five or fewer participators, or
  • Controlled by participators who are directors (regardless of how many participators there are).

"Participator" is defined widely in section 454 CTA 2010 to include any person with a financial interest in the company (shareholders, voting-rights-holders, persons entitled to acquire share capital). For a typical owner-managed property company with one or two director-shareholders, the close-company test is automatically satisfied. Larger family arrangements with five or fewer key shareholders also tend to be close. Quoted companies and certain widely-held structures escape the test, but those are rare in the property landlord context.

Being a close company is not problematic in itself. The close-company status simply opens the gateway to several specific anti-avoidance regimes: section 455 on loans to participators, the settlements legislation in some cases, transfer-of-assets rules, and the CIHC regime that is the subject of this page. Each of those regimes applies on top of close-company status if its own conditions are met.

The qualifying-purpose carve-out

A close company is a CIHC for an accounting period under section 18N CTA 2010 unless throughout the period it exists wholly or mainly for one or more of the following qualifying purposes:

  • (a) Carrying on a trade or trades on a commercial basis.
  • (b) Making investments in land or estates or interests in land where the land is, or is intended to be, let to persons other than persons connected with the relevant company.
  • (c) Holding shares in or making loans to other companies that themselves carry on a qualifying purpose.
  • (d) Coordinating the administration of two or more group members.

The land-letting purpose in limb (b) is the protection for property landlords. The two conditions to clear:

  1. The investment must be in land or interests in land (residential property, commercial property, mixed-use, agricultural land all qualify).
  2. The land is or is intended to be let to persons other than connected persons. The intention test allows companies in pre-let phase (just-purchased properties not yet tenanted) to qualify; the company can demonstrate intention through marketing materials, letting-agent engagement, planning consents, etc.

The "wholly or mainly" test is a substantial-extent test. HMRC's published view (consistent with the trading-company test in CG53116) is that "substantial" means around 20% on any reasonable measure. A company that lets 80% by income to unconnected persons and 20% to connected persons is on the borderline but probably still inside the carve-out. A company that lets 60% to connected persons and 40% to unconnected is probably outside.

The connected-person definition

Section 1122 CTA 2010 sets the connected-person definition. The key categories for property landlords:

  • The director's spouse or civil partner.
  • Direct lineal ancestors: parents, grandparents, great-grandparents.
  • Direct lineal descendants: children (including adopted), grandchildren, great-grandchildren.
  • Siblings of the director or the director's spouse.
  • Spouses or civil partners of any of the above.
  • Trustees of any settlement of which the director is a settlor or beneficiary.
  • Business partners of the director.
  • Companies controlled by the director or by the director and connected persons together.

Several categories of person that landlords sometimes assume are connected are not. Specifically:

  • Cohabiting partners (unmarried, no civil partnership) are not connected for these purposes, although other anti-avoidance regimes may treat them differently.
  • Aunts, uncles, nephews, nieces and cousins are not connected under s.1122 (the definition stops at siblings and lineal relations).
  • Employees of the director or the company are not connected merely because of the employment relationship.
  • Long-term friends and acquaintances are not connected.
  • In-laws beyond spouse-of-sibling get complicated; a brother-in-law (sister's husband) is connected; a sister-in-law's brother is not.

The result is that the connected-person trap is narrower than landlords sometimes fear. A company letting to the director's elderly mother is in the trap. A company letting to the director's nephew or cousin is not (under the standard s.1122 test).

Three worked examples on the boundary

Example 1: arm's-length BTL. Newcastle SPV Ltd holds one residential property in Jesmond, let to a postgraduate student found through a local letting agent. Annual rent £18,000. The tenant has no relationship to the director or the director's family. Conclusion: the company's main (and only) activity is letting to an unconnected person; the qualifying-purpose carve-out applies; the company is not a CIHC. Profits qualify for the small profits rate and marginal relief subject to the associated-companies divisor.

Example 2: single-property family arrangement. Manchester Family SPV Ltd holds one residential property in Didsbury, let to the director's adult son for the duration of his university course. Rent £12,000 (below market rent of £15,000). Conclusion: the company's main activity is letting to a connected person (the director's son is a lineal descendant under s.1122). The qualifying-purpose carve-out does not apply. The company is a CIHC for the period. All profits are taxed at 25% with no marginal relief. The below-market rent also creates a benefit-in-kind issue if the son works for the company; otherwise it is just a foregone-rent question affecting the parent's overall tax position.

Example 3: mixed-let portfolio. Yorkshire Lettings Ltd holds four properties: three let to unconnected tenants for total annual rent of £45,000, and one let to the director's mother-in-law for £8,000 annual rent. Total rent £53,000; connected-party share 15% (£8,000 / £53,000). Conclusion: the company's main activity (85% by income) is letting to unconnected persons. The qualifying-purpose carve-out applies; the company is not a CIHC. The 15% connected-party let is well below the 20% substantial-extent threshold. The position would need re-examining if the unconnected lets shrank or the connected-party rent grew toward parity.

Consequences of CIHC status

For a CIHC, the corporation tax rate is 25% on all profits. There is no small profits rate band, no marginal relief, no taper. The profits are taxed at the top rate from the first pound.

Two consequences that landlords sometimes assume apply, but do not:

  • Loans to participators (section 455). The 33.75% charge on overdrawn director's loan account balances applies to all close companies, not just CIHCs. CIHC status is irrelevant to the section 455 question.
  • Director's loan account mechanics generally. The £10,000 beneficial loan benefit-in-kind, the L2P refund route on cleared loans, the section 464C bed-and-breakfast rule and the requirement to charge official-rate interest to avoid BIK all apply regardless of CIHC status. They are close-company rules, not CIHC rules.

One consequence that landlords sometimes overlook:

  • Group structure can rescue CIHC status. A holding company that holds shares in subsidiary companies which each satisfy a qualifying purpose is itself satisfying limb (c) of the qualifying-purpose test. A CIHC subsidiary inside a group does not necessarily contaminate the parent. The position is per-company, not per-group, and the qualifying-purpose test is applied at each company separately.

IHT for shareholders: a separate question

The CIHC question is a corporation tax question. The shareholder's inheritance tax position on death is governed by separate rules in the Inheritance Tax Act 1984. The headline rule for property company shareholders: shares in a property investment company do not qualify for Business Property Relief (BPR) under section 105 IHTA 1984 because the company's business consists wholly or mainly of "holding investments".

The Pawson v HMRC [2013] line of cases confirms that residential letting is investment activity for BPR purposes, regardless of the level of services provided. This applies whether the property company is a CIHC under section 18N or not. A non-CIHC BTL company still has shares that fail the BPR test because the underlying activity is investment.

Property trading companies (genuine development, building-for-sale) can qualify for BPR because the activity is trading rather than investing. The same trading-vs-investment dividing line that determines SSE applicability (see our SSE guide) also determines BPR availability on death. The two regimes use very similar tests but the consequences (corporation tax exemption on exit vs IHT relief on death) are completely separate.

How CIHC status can be acquired or lost mid-year

The CIHC test is applied "throughout the accounting period". A company that satisfies the qualifying-purpose test for ten months of a year but lets to a connected person for the other two months is not in CIHC status for those two months only; the test looks at the whole period. The wholly-or-mainly framing matters: HMRC will look at the dominant activity across the period.

That said, a substantial change of letting arrangements mid-year (a property let entirely to a connected person for nine of twelve months, then re-let to an unconnected tenant for three months) can tip a company into CIHC for that accounting period as a whole. The fix is typically to align the change with a year-end where possible, or to accept the CIHC status for the year of transition and plan for non-CIHC treatment from the following year.

Reviewing your CIHC position

The annual CIHC review is mechanical. For each company in the structure:

  1. List each property held during the accounting period.
  2. Identify the tenant of each property and check against s.1122 connection.
  3. Calculate the share of rental income (or property value, or floorspace) attributable to connected-party lets.
  4. If the connected-party share is materially above 20% on any measure, expect HMRC to treat the company as a CIHC.
  5. If the connected-party share is materially below 20%, document the position in the year-end working papers and proceed on non-CIHC basis.
  6. Borderline cases (15% to 25%) deserve a specific written analysis on the file, ideally with a recommended fix path if the position would otherwise trend toward CIHC.

Where a company turns out to have been a CIHC for an earlier period that was filed as non-CIHC, HMRC can amend the return inside the normal discovery windows (4 years for ordinary cases, 6 for carelessness, 20 for deliberate inaccuracies). The cost of correcting late is the difference between the rates plus interest on the late-paid corporation tax. Penalties depend on whether reasonable care was taken in the original return.

Where CIHC status sits in the wider picture

For most property landlords, the CIHC question turns out to be uncomplicated: the qualifying-purpose carve-out protects arm's-length BTL companies and the only risk is the family-housing arrangement that creates a connected-party let. Once that risk is identified, the response is usually mechanical (either accept CIHC status if the family arrangement is essential, or end the connected let if not).

The broader corporation tax planning toolkit for property companies (marginal relief mechanics, associated-companies arithmetic, group relief for losses, intra-group transfers, extraction routes) is unchanged by CIHC status. CIHC determines the rate (25% flat) but not the structure of the rest of the tax position.

For the related topics in this series, see our corporation tax group relief guide, marginal relief mechanics guide, and extraction routes guide.