Property  

The benefits of commercial property purchase

A company that rents its premises will be subject to rent reviews (often five-yearly) and landlord demands. Many companies would prefer to have greater control and long-term security over their business premises. From an investment perspective this is also attractive since the owners have ready-made and known tenants. Commercial property can be purchased by individuals (for example, the directors or shareholders), a pension scheme or the company itself.

Personal ownership

A commercial property could be bought and owned by directors or shareholders and subsequently leased to the business at a market rent. The individual owners are then liable to pay income tax on the rental income, which is a national insurance contribution-efficient method of extracting profits from a company. From the businesses perspective, rent is an allowable expense and so reduces the company’s corporation tax liability.

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A commercial property could be bought and owned by directors or shareholders and subsequently leased to the business at a market rent. The individual owners are then liable to pay income tax on the rental income, which is a national insurance contribution-efficient method of extracting profits from a company. From the businesses perspective, rent is an allowable expense and so reduces the company’s corporation tax liability.

The individuals can later sell or wind up the business independently of the property.

For example, they could continue to rent out the premises to provide income in their retirement. Entrepreneurs’ relief, as outlined in Box 1, may be available on eventual sale, otherwise capital gains tax (CGT) would apply at a maximum of 28 per cent.

Personal ownership by an individual director or shareholder puts the assets at risk of creditors, divorce, death and – potentially – the timing of retirement. Where multiple owners are required, contingency plans and agreements should be put in to place.

This may include double option agreements backed by life and critical illness insurance to fund the buyout of a share in a property by the other directors. This should be part of wider director/shareholder protection plans and agreements.

Ownership on an individual level would normally require personal borrowing to fund the purchase and this gearing leads to increased personal risk. Only 50 per cent of business property relief is available to majority shareholders.

Corporate ownership

The clear advantage of the company buying the property is that it avoids the complications of personal ownership on a director’s death, divorce or retirement. The company avoids paying rent and is likely to be able to borrow more money than an individual could either through personal borrowing or a pension scheme to purchase property.

The interest payable on any debt is tax-relievable. A full 100 per cent business property relief should be available on the value of the property (depending upon the nature of the trade) and CGT payable at 10 per cent on sale due to entrepreneur’s relief.

However, there are potentially two layers of taxation on gains – corporation tax within the company when it sells the property and then CGT on the directors when they sell their shareholdings. Of course, a sale of the company’s shares to include the value of the property avoids one layer of tax.