Date posted: 25th Mar 2024
By Tax Partner, Lee Watson 
As Easter approaches, a famous chocolate company used to ask “how do you eat yours?”, in reference to their chocolate egg. In a similar theme, I would like to ask “how do you hold your commercial property….?”
I often see business owners holding their property in a number of ways – some of which can have a variety of tax and financial consequences, which I’ll explore in a little more detail below.
Property held personally
A commercial property held personally can have different consequences, depending upon your choice of trading “vehicle”. Concentrating on trading via a sole trader or partnership:
- Sole trader – If you are a sole trader, then holding the property in your own name, means that you cannot charge rent, to your sole trader business – there is a legal principle, that you can’t charge yourself rent. So there is no allowable deduction, for the rent paid but no tax charge on you, on the rent received from the business (i.e. yourself!).
- Partnership / LLP – A similar situation (to the sole trader) may apply, if the property is owned by a partnership and rented to a partnership, but this depends upon the correlation between the owners of the property and the partners in the partnership.
Bearing in mind that you will need to acquire a property, the initial funding of the acquisition, is likely to either come from personal monies or borrowing. The borrowing can arise as a result of taking an extended mortgage, against your main home. There may be tax relief available for any interest costs, but again, this depends upon the actual circumstances.
In the above scenarios, when you come to sell the property, it will be your property to sell and there may be an opportunity to limit the tax charge on any profit from a subsequent sale, to 10%, under the business asset disposal relief (“BADR” – previously known as entrepreneurs relief) rules. However, again this depends upon a number of factors including whether any rent is charged, whether you have previously claimed BADR and whether there is an associated sale of a business.
Property held in a company
Again, commercial property held in a company, can have different consequences, depending upon your choice of trading “vehicle”.
Trading as a sole trader / partnership
Owning the property in a limited company and renting the property to your sole trader/partnership business is viable and you would be able to claim a deduction for the rents paid (again, if reasonable) as the property company is a separate legal entity. The property company is, of course, taxed on the rental income it receives.
Again, the property company will need sufficient funds to acquire the property and therefore you would need to consider how the property company is funded. This could be by loans from you to the property company, with further borrowing in the property company, as required.
This may be a way of minimising tax as the property company will pay tax at maximum 25% under rules (from 1 April 2023) whereas you may personally pay 26% income tax / national insurance as a basic rate taxpayer or possibly as high as 47% income tax / national insurance as an additional rate taxpayer. This means that you may attain relief at 47%, on the rents paid and the property company only pays 25% on the rents received.
Should you need to extract funds from the property company, then there will be tax payable on the monies extracted, unless these are loan repayments or loans made, by the property company, which will be repayable.
Commercially, you need to consider whether the costs of running a company are viable. This could be the additional interest costs that banks are likely to charge and the additional professional fees of preparing statutory accounts and corporate tax returns. In addition, information will be available on the public record, in relation to the company’s worth.
Trading through a company
It may be possible to own the commercial property via the actual trading company, another group (or holding company) or possibly a completely separate company.
The corporate tax situation should essentially be neutral as either the property is owned in the trading company which means that no rent is charged or any rental income paid to a separate property company will be taxed at 25% and relieved at 25% in the trading company.
There are a variety of other tax and commercial considerations, such as:
- Protection – if you hold the commercial property in the trading company then if there was a subsequent liquidation event, the property could be lost. If you hold the property in a separate company, this is likely to be protected from the liquidator, unless there are cross guarantees.
- More than one company – more than one company means more professional fees and possibly higher financial costs.
- Future sale of the trading business – the new owner of your trading business may not want to acquire the commercial premises, so you may need to plan for the property ownership in the future. In addition, depending upon structure chosen, the tax situation can be quite complicated if you want to extract the monies from the sale of the trade.
- The amount and timing of any corporate tax payments may be impacted, by the number of companies you own.
Property held in a pension
A pension is often the chosen route for holding commercial property. This is because:
- The pension funds can be increased by the business owner, tax efficiently.
- Rents received by the pension are not taxed.
- The growth in the value of the property is tax free.
- The business receives a tax deduction for the rents paid.
- Rents paid can be in addition to normal pension contributions, which are capped each year, under the complex annual allowance provisions.
However, borrowing to acquire or build a property in a pension fund, can prove to be problematic and needs consideration many years ahead of a proposed acquisition or development.
If you are looking to acquire commercial property, it is vital to talk to a tax specialist ahead of the acquisition to ensure that you are aware of the longer-term tax issues. Of course, there may be more immediate issues ahead of an acquisition such as VAT and a claim for capital allowances, so advice should be sought at the outset as it is more costly to re-structure the corporate group, after the acquisition has taken place.
Residential properties are an entirely different proposition and can be problematic when held in a trading company. However, we can help structure your companies, to help overcome both commercial and tax issues.
As ever, we are here to help, you can contact our experts here.
