Tax Consequences of Renting to Business

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In many businesses, the directors who also own the company also own the commercial property from which the business operates. The reasons for this are varied, and some may be historical, such as the fact that the business was initially operated as a single trader but is now run as a company. On the other hand, most company owners own their business premises. This means that if the company should fall bankrupt, a property owned by the director is often secure from the liquidator and any creditors (unless fraud or negligence is involved).

In most cases, the initial reason for personal ownership has nothing to do with income tax; however, depending on the individual’s marginal income tax rate, charging the company may prove to be more tax efficient than withdrawing money in the form of a dividend from the company. Typically, the original reason for personal ownership has nothing to do with income tax. To determine whether or not charging rent is beneficial from a tax perspective, it is necessary to examine not only the immediate tax situation of the director and the company but also the potential capital gains tax (CGT) situation that will be present when either the property or the company is sold.

Gain for the director as a whole

The principal benefit of this arrangement for the director is that, in contrast to the case with dividends, the company doesn’t need adequate distributable earnings for the payment to be made. Because the amount is not in the form of a salary or a bonus, no National Insurance Contribution (NIC) costs will be levied on either the company or the director. In addition, if there is a mortgage on the commercial property, the taxpayer may be eligible for tax relief that may be used against the rental income from the property. The director will be responsible for paying income tax at their marginal tax rate on any rent collected, less any rental charges incurred. This is referred to as the “downside.” Profitability for the business.

Full corporation tax relief is granted to the company on payments made, and there is no expense to the employer for national insurance contributions (as not salary or a bonus).

As a result of the selling of the company

Should the company be sold, this might create some complications if the company owns the property. It’s possible that many purchasers won’t want to buy the premises as well because they already possess their own. However, suppose the trader holds the premises individually rather than as part of the company. In that case, they have the benefit of being able to buy simply the trade without also having to sell the premises.

One might be eligible for Business Asset Disposal Relief if there is qualified disposal of shares and a sale of a “related asset” at a gain (BADR). Business Asset Disposal Relief is available on disposals of business assets, reducing the rate of CGT on qualifying gains to 10%, subject to a £1 million lifetime limit. The asset must have been owned by a shareholder and used by their “personal company” when the business has ceased operations or part or all has been sold. However, if you charge the full market rent, any relief you could have received would be nullified because the property will be considered an investment asset. In addition, if the company pays rent lower than the market rent or if the company has paid rent after April 6, 2008 (the date on which the rules changed), the proportion of gain on which BADR can be claimed is restricted in proportion to the amount of rent paid. This is because the market rent is higher.

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