Are you holding your business premises correctly?

Published by Jo White on 12 January 2023

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When running a business, the question as to the type and size of Real Estate that is needed is something business owners and management will ask themselves periodically over its lifecycle.  The Real Estate footprint of a business at the start is undoubtedly going to be different to that required once it is more established.

As a result of COVID we saw an increased requirement to work from home which, for most, has become a more permanent option. The introduction of hybrid working, even before COVID, has meant the decision on what type of Real Estate presence a business needs is no longer the same as it was even 2 years ago, irrespective of its level of success over this time.

We often see with our clients that initially, renting a suitable space is the most preferred option.  This allows the business owners to decide whether the type of building and location is appropriate with the ability to change their mind within a relatively short period, with minimal cost.  Especially if their business plan sees significant growth over this time.

However, the appetite to acquire a property has not changed.  Many business owners see holding the freehold, or long leasehold of their own business premises as an opportunity for longer-term financial security.

Holding options

Whilst owning a property can have financial benefits, how it is owned can cause some headaches longer-term.  This will depend on the type of property being acquired and the intentions for the business in the future.  Examples may be to hold it:

  • personally
  • in a pension
  • in the existing business structure
  • in another company, whether standalone or within the business group.

What are the tax implications?

How you hold Real Estate comes with its own tax considerations; whether on the sale of a business or indeed should you retain the business and property longer term.

Funding the property purchase will often be from surplus profits generated by the business overtime.  Where a business is being run in a company, then rather than extracting the profits and paying tax on this to acquire the property, it can be seen as a more beneficial option to acquire the property in the existing entity.

What we have seen however is that the purchasers of the business will unlikely want the property itself and therefore ahead of a business sale, the property needs to be extracted, potentially at a significant tax cost to the sellers.  Alternatively, the purchasers may just buy the trade and assets of the company. However, this is not as tax efficient for the business owners compared to a sale of shares.

Holding property personally

If you hold the property personally and it is used by a trading company that you control, then you will be able to claim tax relief on the value of the property on your death, or a lifetime gift for Inheritance Tax (“IHT”) purposes.  However, this is limited to a maximum of 50% of its value.

Holding property in a company

In contrast, holding the property in the company may benefit from 100% IHT reliefs on its value.

There could be potential tax consequences if the property is not sold as part of the overall business.  Further, where there is surplus space which is being rented to other parties then this could taint the overall status of the company or group potentially prejudicing both Capital Gains Tax (“CGT”) and IHT reliefs longer term.

Holding property in a pension

Holding the property in your pension currently comes with tax exemptions on the rental income charged, CGT and IHT.  You may be limited to how much of the property you can hold depending on the value of your pension at the time of acquiring it.

Is there a right answer?

Yes, but it will be different in every circumstance. Getting advice ahead of acquiring Real Estate is important, as is a periodic review of yours and the businesses circumstances to ensure the current ownership of the property is still appropriate. Tax efficient reorganisations are possible, but only should there be sufficient time to do this ahead of a business sale.

Owning Real Estate is a long-term investment.  Planning for this is therefore important to ensure not only to you get the best commercial use but also the most tax efficiencies on its value or income.

For more information and guidance on finding the right solution for you, please contact Jo White or Jeremy Marshall. Alternatively, please visit our contact us page to get in touch with a member of our team.

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