Have you thought about the tax implications of the ownership of business property lately?
There are major tax implications surrounding entrepreneur’s relief, business property relief for inheritance tax purposes and tax relief for interest costs, to be balanced against commercial protection and the ease of selling the trading business separately from the business property. Full consideration must be given to the tax implications of a sale or purchase on the business entity that transacts it?
Have you been in this situation recently?
- My landlord has recently approached me to see if I’d like to buy the premises from which I trade?
- I’m in the throes of buying a commercial property and I’m not sure whether I should own the premises separately from my trading business? If I choose to own the property outside the business, what’s the most tax efficient way to hold it?
- I’d like to buy/sell a business, but I don’t want to buy/sell the property. How do we separate the two?
Broad Brush Solutions
In deciding on a structure for owning property many people opt to hold the property outside of their trading business, believing it protects the assets from the commercial risk of insolvency. Alternatively they don’t take tax advice and simply purchase the property inside the trading company.
To maximise the tax efficiency of any decision they should consider:-
- Entrepreneur’s Relief – particularly relevant if a sale is planned in the medium term. If property is held within the company, the value of the property is included within the share valuation, thereby qualifying for entrepreneur’s relief. If property is held outside the company, entrepreneur’s relief may be reduced or nil.
- Business Property Relief – owning the property outside the company means business property relief is reduced to 50% or nil.
- The complexity of sale of the trading business as distinct from the property and the capital gains and corporation tax impact of this.
Accepting that we are generalising, the main pros and cons of “inside v outside” are considered below:
- The main issues with holding the property inside the company are lack of commercial protection and complications if the business is to be sold but the purchaser does not want the property.
- Personally - if clients choose to hold the property personally, i.e. outside of the business, there are significant inheritance tax and entrepreneur’s relief issues but the property is protected from commercial risk and sale of the trading business is straightforward.
- Pension scheme - can be an attractive option. Largely positive for inheritance tax, capital gains and simple sale, but the initial purchase of the property by the scheme has to be funded and access to the resultant monies is only available on retirement.
- Separate company – this is fraught with problems, unless the company owning the property is a holding company of the trading subsidiary.
Here's one we made earlier
We have advised many clients on this very issue. One case study concerned a single company which owned its trading premises and the accommodation above which it let. In transacting the sale of the business, the purchasers wanted to purchase the trading business but not the premises, preferring to lease these from the owner.
Bates Weston orchestrated the tax-free extraction of the property from the trading business, together with the surplus cash in the business and put these into a newly formed investment business. The trading business could then be sold with a minimum of capital gains tax.
If you would like to discuss your own circumstances further, please do contact Graham Buckell on 01332 365855 or email firstname.lastname@example.org.
This advice is general in nature and you should take no action without consulting your professional advisors.