Give us your details and we’ll be in touch asap

Insights

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

Business Services  •  Business Tax  •  Capital Gains Tax  •  Entrepreneur's Relief  •  Personal tax  •  Property  •  Small Business  •  Tax Planning  •  Tax Relief  •  Taxation

Capital gains tax issues for business owners who own commercial property

By RJP LLP on 14 July 2016

 

Updated: 10th September 2019

Over the years, many company owners have taken a commercial decision to personally own their business premises. In many areas, it’s cheaper to buy property than to rent and there are also some tax efficiencies.

Using common scenarios, this blog highlights the capital gains tax issues for those who decide to purchase commercial property and how business owners are affected, suggesting some alternative approaches. Consider the following scenarios to appreciate the different impacts of new tax rules:

 

Situation 1: Claiming entrepreneurs’ relief on commercial property

This example explains the tax impact if you do not charge the company rent and sell the property

John is the managing director and main shareholder of a limited company. He also personally owns the offices from which the company trades, having bought them as an investment. John has chosen not to charge his company rent for its use of the premises, but has instead drawn a small amount of dividend income from the company. His total income has been within his basic rate band each year and he has therefore minimised the tax payable on the dividend income he receives. Because he has received no rental income and because the property is used for the business of his personal company, when he sells the commercial property he will be able to claim entrepreneurs’ relief and pay capital gains tax at the rate of 10%.

Situation 2: Claiming loan interest tax relief on a commercial property

Tax impact if you do charge the company rent to cover a mortgage and sell the property?

Katherine is in a similar position to James as a shareholder and company director. She also owns the company premises but rather than let the company occupy the property rent free, she has opted to charge rent which she charges at a rate which is lower than market rate. The rental income she receives is chargeable to income tax, but she has a loan on the property and is able to deduct the loan interest in order to reduce the tax she pays on the income. Since it is commercial property there is no restriction to the rate of tax she can claim on the loan interest she pays. On a disposal of the property she will still be able to claim entrepreneurs’ relief, but this will be restricted by the amount of rent she has charged.

 

Situation 3: Obtaining rental income from commercial property in lieu of salary

Peter is also a company director and owner of his company premises. He charges his company a full market rental for the use of his commercial property and declares this income in full on his self-assessment tax return. If he didn’t take a rental income he would need to receive a higher salary or dividends from the company.

It is beneficial for Peter to receive rental income rather than additional salary or dividends because rental income, whilst attracting corporation tax relief for the company, does not incur employee’s or employers’ national insurance contributions.

 

Tax planning is never an exact science

These scenarios serve to highlight the many different tax issues a company owner with commercial property interests needs to consider when he or she rents personally owned property to their company. There are pros and cons to each situation we have highlighted. Each case needs to be evaluated individually, taking into consideration the immediate taxation implications and longer-term ownership plans, including the relative benefits of preserving access to other capital gains tax relief in the future.

partners@rjp.co.uk

 

 

 

Read more articles like this

Is it time to review your payroll operations?

Beware of ‘tax efficient investments’ involving offshore trusts

Managing the reduction to AIA (Annual Investment Allowance)

Mitigating the worst impacts of an inflationary environment

More help coming but not quite yet…Chancellor’s Spring Statement 2022

Share this:

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

Image

60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.

 

Updated: 10th September 2019

Over the years, many company owners have taken a commercial decision to personally own their business premises. In many areas, it’s cheaper to buy property than to rent and there are also some tax efficiencies.

Using common scenarios, this blog highlights the capital gains tax issues for those who decide to purchase commercial property and how business owners are affected, suggesting some alternative approaches. Consider the following scenarios to appreciate the different impacts of new tax rules:

 

Situation 1: Claiming entrepreneurs’ relief on commercial property

This example explains the tax impact if you do not charge the company rent and sell the property

John is the managing director and main shareholder of a limited company. He also personally owns the offices from which the company trades, having bought them as an investment. John has chosen not to charge his company rent for its use of the premises, but has instead drawn a small amount of dividend income from the company. His total income has been within his basic rate band each year and he has therefore minimised the tax payable on the dividend income he receives. Because he has received no rental income and because the property is used for the business of his personal company, when he sells the commercial property he will be able to claim entrepreneurs’ relief and pay capital gains tax at the rate of 10%.

Situation 2: Claiming loan interest tax relief on a commercial property

Tax impact if you do charge the company rent to cover a mortgage and sell the property?

Katherine is in a similar position to James as a shareholder and company director. She also owns the company premises but rather than let the company occupy the property rent free, she has opted to charge rent which she charges at a rate which is lower than market rate. The rental income she receives is chargeable to income tax, but she has a loan on the property and is able to deduct the loan interest in order to reduce the tax she pays on the income. Since it is commercial property there is no restriction to the rate of tax she can claim on the loan interest she pays. On a disposal of the property she will still be able to claim entrepreneurs’ relief, but this will be restricted by the amount of rent she has charged.

 

Situation 3: Obtaining rental income from commercial property in lieu of salary

Peter is also a company director and owner of his company premises. He charges his company a full market rental for the use of his commercial property and declares this income in full on his self-assessment tax return. If he didn’t take a rental income he would need to receive a higher salary or dividends from the company.

It is beneficial for Peter to receive rental income rather than additional salary or dividends because rental income, whilst attracting corporation tax relief for the company, does not incur employee’s or employers’ national insurance contributions.

 

Tax planning is never an exact science

These scenarios serve to highlight the many different tax issues a company owner with commercial property interests needs to consider when he or she rents personally owned property to their company. There are pros and cons to each situation we have highlighted. Each case needs to be evaluated individually, taking into consideration the immediate taxation implications and longer-term ownership plans, including the relative benefits of preserving access to other capital gains tax relief in the future.

partners@rjp.co.uk