How should I buy a commercial property?
When considering purchasing property the question often arises as to who should be buying it. For commercial property, there are often more avenues to explore including a company (whether your existing one or a new entity), personally (whether as an individual or in partnership with someone else) or a pension. Each of them come with their own tax considerations which need to be understood in full before making the final decision.
Acquiring a commercial property in a pension will allow for rental income to be received tax-free and any capital growth to be exempt from tax when the property is sold. This can be a very attractive option for investing in property longer term. The pension fund, however, has to have sufficient value to be able to acquire the property with financing limited to 50% of the value of the pension fund at the relevant time. It is possible to acquire a share of the property within the pension fund with the other part being acquired by another person. If this is an option which is of interest to you then it is important you speak with a pension advisor to explore your options further. The value of your pension is not subject to inheritance tax therefore saving 40% on the value of the property on your death.
Buying the property personally will mean that any rental income receivable will be taxable in your own name. Depending on your other income this could be at 20%, 40% or 45%. At the moment, rental income does not attract National Insurance. Certain expenses are deductible from any rental income received which directly relate to maintaining the property. This can include, but is not limited to, insurance, repairs, finance costs, agent fees. Where you carry out work on the property then depending on the work undertaken it may be possible to claim tax relief in the year the works are carried out. Where you are improving the property then this relief is likely to be restricted until you sell the property, but capital allowances or structures and buildings allowances may be available. When you come to sell the property, you would pay capital gains tax on any profit realised. The highest rate of capital gains tax on commercial property is currently 20%. The value of the property (less any mortgage) is subject to inheritance tax in your estate. Where the property is let out for investment purposes then 100% of the value would be subject to inheritance tax on your death, assuming you still own it at that time. If the property is used by a trading business then it is possible, subject to certain conditions, for only 50% of the value to be subject to inheritance tax due to the application of business property relief.
When considering buying the property in the company you first need to decide if it will be a new company or an existing company which is the better option. This decision is often more complex where the property is being purchased to be used by your own trading business, as whilst there are benefits from a capital gains tax and inheritance tax perspective of acquiring it through the trading business, should you later sell the trade without the property there could be additional tax costs that you were not expecting. Where the property is rented by the company then the same deductions can be applied as mentioned above in computing any profits. Corporation tax is paid on the rental profits which is currently 19%. If the property is sold by the company then corporation tax would be paid on any gain realised, again at the same rate. The value of the property would be tied up in the shares. Any shares held in your estate will be subject to inheritance tax however where the property is held in the trading business 100% business property relief will be available reducing your inheritance tax exposure on this value to nil. The disposal of the shares, either through a sale, gift or liquidation would be subject to capital gains tax. The type of company and type of disposal will impact the tax position payable by you on this.
As you can see from above there are a lot of factors to consider and there is no one single answer which fits all scenarios. The key matter is to take tax, finance, and legal advice early enough in the process to make sure you are getting the most out of your investment.
To discuss the topics explored in this article, contact Jo White.
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