Buying Business Property
By Nick Braun PhD
A lot of business owners eventually decide to buy their own premises. Why pay rent to some landlord when a mortgage won’t cost you all that much more? At the end of the day you’ll end up with a valuable asset.
Owning premises also gives your business tremendous security. If you rent a flat and your landlord decides not to renew the lease all you have to do is find somewhere else to live. Usually not a problem.
But if your business is forced to find new premises that can be a far more costly and stressful exercise – especially if you rely on a specific location to attract customers.
If you decide to buy a property and you have an incorporated business (a company) one of the key decisions you have to make is whether to buy the property personally or through the company. Each route has tax benefits and drawbacks.
The main tax benefit of buying the property personally is that people pay capital gains tax but companies pay corporation tax. And the capital gains tax treatment of business properties is ridiculously generous.
When the property is eventually sold it will probably qualify for the snappily named ‘business asset taper relief’. In a nutshell, the maximum tax you will have to pay on all your capital growth will be 10%, possibly even lower.
But if your company owns the property it will pay corporation tax on the capital growth and the tax rate will be at least 22% (the small companies tax rate is rising from 20% to 22% over the next couple of years). Companies do qualify for indexation relief but it is much less generous than business asset taper relief.
Furthermore, when you extract the remaining profits from the company you may have to pay income tax as well!
Although business asset taper relief is extremely generous, it’s important to stress that there is no guarantee that it will be around in 10 or 20 years’ time. Taper relief was introduced by the Labour Government in 1998 – who knows what future governments will do to capital gains tax in the years ahead
The main tax benefit of buying business property through your company is to save inheritance tax.
Business assets are treated more generously than pretty much any other type of asset when it comes to inheritance tax. Thanks to business property relief (BPR) most businesses can effectively be passed on to children and other heirs tax free. If your company owns its own premises that asset also qualifies for this generous relief.
However, if you personally own the business property which your company uses, the maximum BPR to which you are entitled is 50% – which means the remainder will be subject to inheritance tax and possibly taxed at 40%.
There are lots of other tax benefits and drawbacks to owning business property personally or through a company. The non-tax factors are equally important. For example:
- To protect your wealth in the event of legal action against your business, it may pay to keep valuable property outside the company. That way it will be out of reach of potential creditors.
- Making the bank happy could be a decisive factor and depending on personal circumstances it could be easier for either the individual or company to borrow the money.
- Having the company own its premises could be seen as either a tremendous advantage (or drawback) if you eventually decide to sell your business and need to attract a buyer. It will depend entirely on the nature of the business.
More information on this subject is contained in the Taxcafe guide How to Avoid Property Tax
