Constructing purpose-built business premises can be one of the major investments any business owner can make during his or her lifetime. It is hugley important to understand the various Commercial Property Ownership Structures available.
There are some important factors to consider such as bank funding, protecting the property from trade-related risks, the availability of capital allowances and whether it is appropriate to use pension funds to build your own commercial property.
Outlined below are the standard commercial property ownership structures and some benefits and pitfalls of each:
Benefits and pitfalls of different commercial property ownership structures
- It is likely that financing the build outside of the business structure will prove more challenging since the repayment of any debt will be based on rentals and the ability of the individual to repay personally
- Where a certain level of income is required to finance debt, the shareholder has less control over the level of rental profits. This could lead to higher rates of income tax being suffered.
- Capital allowances on qualifying build expenditure are available to an individual owner, the effect of which can reduce the overall rental profit.
- The company can obtain corporation tax relief for the rentals paid to the shareholder unlike with some other commercial property ownership structures.
- Tax reliefs such as rollover relief, gift relief and entrepreneurs’ relief may still be available. Although entrepreneurs’ relief will be restricted where rent is paid by the company.
- Property held by a controlling shareholder but used exclusively by the company can attract an inheritance tax (IHT) relief, the effect of which reduces the value of the property subject to IHT by 50%.
- A separate VAT registration will be required to reclaimVAT on any eligible build costs and as part of this, the property owner would have to exercise an option to tax in respect of the property. The effect of the option to tax is that the rental income then becomes standard rated for VAT purposes rather than VAT exempt and VAT will then be charged for the rentals to the company. In most cases, the trading company will be able to recover the VAT charged through its VAT returns. Please note that there are some anti-avoidance measures to consider where the trading company is involved in VAT-exempt business activities or non-business activities.
- The general advice on opting to tax is that it is only put in place where the VAT on the associated costs is significant, such as the case in question where a new commercial property is being constructed. Once taken, the option to tax cannot be revoked for at least twenty years, meaning that the VAT position has to be considered for all lettings or indeed a disposal within that period.
- Another important point to note here is that where project carries a VAT exclusive standard rated value of £250,000 or above, the commercial property has to be used for taxable business purposes for a period of at least ten years. If this condition is not met, adjustments to the VAT originally reclaimed may be required under the Capital Goods Scheme.
- Stamp Duty Land Tax (SDLT) may be payable even where a formal lease is not agreed between shareholders and company.
- Lower interest rates may be achieved by a company over an individual, particularly where trading profits are strong.
- The corporation tax rate is at its lowest in decades, irrespective of the profits generated generally only one rate can be suffered by a company (currently 19%).
- Capital allowances on qualifying build expenditure are also available to companies, however, the annual investment allowance (which writes off the entire cost of assets) may already be utilised by investment in other company equipment.
- The company can obtain corporation tax relief on interest paid in relation to finance secured on the property.
- Companies still attract indexation allowance, the effect of which mitigates the impact of inflation upon the original cost. Following the disposal of the property, this inflated cost can be offset against any proceeds received, reducing the overall amount subject to corporation tax.
- Rollover relief is available to a company; gift relief and entrepreneurs’ relief are not.
- Generally, if a company undertakes trading activities and the property is used exclusively by it, the property value will likely be protected from IHT in full.
- With regard to VAT, the company would be able to recover the VAT incurred on the development provided that it uses the building for the purposes of a fully taxable trade. Where the company’s business activities are a mixture of taxable and exempt supplies, its VAT recovery will be restricted to the taxable use.
- The Capital Goods Scheme can also have an effect here. The company would again need to use the premises for a fully taxable purpose over a ten year period, to fully protect its VAT recovery on the initial build.
- As above, but with the added protection from the trading business activities.
- There is no difference to the IHT position of a single company, so long as overall the group is trading.
- From the VAT perspective, the holding company would need to register for VAT and opt to tax the building carrying the same implications as set out above. Consideration could also be given to setting up a VAT group registration so that the rents charged from the holding company to the VAT group member are treated as outside the scope of VAT.
- SDLT group reliefs may apply but must be applied for.
Self Invested Personal Pensions (SIPP) / Small Self Administered Scheme (SSAS)
- SIPPs and SSASs can be used to build and own the structure itself. SSASs can also lend funds to the company; this facility might be useful for fitting out the premises once built.
- Pension funds are not taxable (either on income or capital growth), therefore the trustees cannot claim capital allowances. The company may wish to finance (in particular) capital allowance elements of the build to ensure tax relief is maximised.
- Market value rent will be payable by the company, attracting corporation tax relief on the payments made. These payments are not considered to be part of an individuals’ annual allowance and can be a useful tool where the shareholder is limited in this respect.
- Pension funds can be extremely IHT efficient compared with other commercial property ownership structures.
- The trustees of pension schemes can opt to tax and register for VAT in the scenario where they build and let the commercial property. Doing so will mean that the VAT incurred on the development and letting of the property can be claimed. The VAT implications for the trustees will be exactly the same as for any other type of owner/developer with regard to the period covered by the option to tax and Capital Goods Scheme.
- SDLT is likely to be payable, this will be based upon the lease agreement entered into between the pension trustees and the company.
- Using pension funds is extremely tax efficient, but this must fit with the retirement plans of the business owners.
- Like the holding company structure, pension funds are also a useful tool for risk mitigation.
Structuring the ownership of commercial premises effectively can provide much-needed tax relief to businesses, at a time when cash flow is stretched from the investment of a new build. Furthermore, the reduction in cash outlay for the various taxes, in turn, can assist with bank funding negotiations. If you would like have a further discussion about Commercial Property Ownership Structures please do not hesitate to get in contact