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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.
