Ownership Of A Company's Business Premises
What are the benefits and pitfalls?
POSTED BY HELEN BEAUMONT ON 25/09/2019 @ 8:00AM
In certain cases, the business premises traded from will be owned by one or more of the company's shareholders ...
Do you own or rent your business premises? There will be differing tax implications!
copyright: bialasiewicz / 123rf
If this is the case for your business, then you can charge the company a rental fee for the use of the premises. You will be liable for paying income tax on the rent paid, but just like salaries, the rent becomes an allowable expense for the company. Unlike a salary though, no National Insurance contributions are due.
"It is very important that the rent charged is no more than that which is paid on the open market!"
If it is, then the excess amount will not be treated as an allowable expense for the company, and will instead be classed as a 'distribution' to the shareholder/landlord. Distributions are taxed just like dividends so that the company cannot deduct them for tax purposes. The recipient of the excess rental payments will pay tax at 32.5% once the dividend allowance has been used up if they are a higher rate taxpayer.
If these dividends fall within the basic rate band, the tax rate is just 7.5% once the allowance has been utilised. It does make sense for the company to have a written lease from the property owner, so that the business can make any required alterations and do repairs without the risk of the property owner being taxed on the 'benefit' of the work done.
There are, however, downsides to the arrangement:
Entrepreneurs' Relief may reduce the rate of Capital Gains Tax (CGT) on the sale of shares to just 10%, and it can do the same for the sale of the premises by the landlord/shareholder.
Yet, if the company has paid a rental income since the rule changes in April 2008, the amount of the gain on which Entrepreneurs' Relief may be claimed is restricted. This is in proportion to the level of rent paid. If the rent is a tiny amount, there is no restriction, but if it is a full market rent, no Entrepreneurs' Relief is available.
It's also worth noting that any shares in a business will usually escape inheritance tax on the death of the shareholder, as they would most probably qualify for 100% Business Property Relief (BPR).
But if the business premises are owned outside the company, the BPR rate is restricted to 50%, and the relief only applies if the shareholder owns a controlling share of the company.
If you'd like to find out more about the implications of owning or renting your business premises when you're a shareholder, then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
More about Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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