Accountancy & Taxation
Robert Bradley and Steve Parnham work together to offer a full range of busineess taxation, capital taxes and self-assessment services.
Recent projects have included:
- Incorporation of sole trader with goodwill valuation
- Set up of trust as vehicle for for limited company investment property
For more information on how we can help you plan your tax strategies contact Robert Bradley.
COMMERCIAL PROPERTY OWNER ? CHARGING RENT ? THINK AGAIN !
You are the majority shareholder and managing director of a trading company.
You purchase a commercial property with the help of a large mortgage. The mortgage is not a particular concern to you because when the company occupies the property you will charge it a rent for the privilege. This will soak up the interest you will have to pay to the lender and, indeed, eventually pay off the capital. It is also a tax efficient method of extracting funds from a company without a national insurance charge. You can certainly do that but there is nevertheless a fatal flaw in an otherwise sound plan. When you eventually come to sell the property you will find that you have exchanged a potential 10% capital gains tax rate for a rate of between 18% and 28%. Simply by charging rent you will have almost doubled or even trebled the tax hit on a future sale. This is because you cannot claim entrepreneurs’ relief on the sale to secure the 10% rate and charge rent.
What can you do about this ?
Unfortunately, the classic solution is one which may not appeal to you. That solution is often favoured by advisers for its tax efficiency but it is not always an attractive one for a business owner. It involves placing the property in a self invested pension plan or SIPP. The tax efficiency comes about because all income received and gains accrued within the pension plan are tax free but if you do not wish to lock the underlying value into a pension scheme and need unrestricted access to that value, such tax efficiency may come fairly low down on your list of priorities. Even if you are comfortable with the pension route you may find a further problem in that the SIPP is subject to the annual allowance and lifetime allowance cap which could limit the amount you can give ( though a possible solution is for the SIPP Trustees to borrow up to 50% of the SIPP’s net asset value to facilitate the purchase ).
So what if the pension route simply does not appeal ?
You should really be looking to something a little more original from your advisers !
The simple fact is that as long as the charging of rent does not take place within your period of ownership, no chargeable gains will accrue to you for this period. So why not consider gifting the property to your spouse, subject to the mortgage lenders approval of course. Your other half can then charge rent to the company which will help to pay off the mortgage. How will this help you to reclaim that alluring 10% capital gains tax rate ? All you have to do is remember to ensure that at least 12 months before the disposal of the property, your other half transfers the property back to you. As long as you do not then charge the company rent until the eventual sale, the entire capital gain will be eligible for entrepreneurs’ relief and you will have secured a 10% rate of tax. Simple but effective ! But do it with professional advice to avoid the pitfalls.
