Choosing how to own business property
It can be difficult to decide whether to buy a business property in your own name or within your company, which will use the property for its trade. If the cash for a purchase is available for either route, the decision will turn on the tax implications.
Personal purchase
If you buy the property, you can receive commercial rent for leasing it to your company. The rent is free of national insurance contributions, so represents a tax-efficient way of extracting funds from your company. The rent paid should be fully tax deductible for the company.
If your spouse or civil partner pays tax at a lower rate than you, holding the property in your joint names can reduce your family’s total tax bill. Your partner’s portion of the rent becomes taxable at a lower rate. The property need not be held on an equal basis. You need to inform HMRC of each person’s holding using form 17, and declare the relevant proportion of the rents on your own tax returns.
Any gain on the sale of the property after deduction of the annual exemption (£10,100 in 2010/11) may be taxed at 18% or 28% in your hands. Companies pay tax on gains at 21% or 28%, reducing to 20% and 27% from April 2011. The company cannot deduct the annual exemption, but it can claim indexation allowance, which reduces the gain by the effect of inflation. If the company sells the property the proceeds will be trapped within the company, and may incur another tax charge when you extract them.
If you do not charge a full market rent for the property, you may be able to claim entrepreneurs’ relief on any gain made on disposal. This reduces the rate of CGT to 10% on a gain of up to £5 million per taxpayer, but it only applies if the property is sold in association with your withdrawal from the business and the disposal of some of your company’s shares.
Corporate purchase
Holding the property in the company allows the full value of the property to be sheltered from inheritance tax (IHT). If you hold the property personally, only 50% of the value escapes IHT. If you’re faced with this choice let us know and we will be able to help.