Are you maximising the benefit from commercial property investment?
Whether you already own commercial property, or are interested in investing, the recent increase of Entrepreneurs’ Relief to £10 million for couples mean it is an area not to be ignored by the wise investor.
So how does Entrepreneurs’ Relief apply to commercial property?
In the past, many well advised owner managed businesses who used commercial property in their trade would have structured the ownership of the property to be in the hands of the proprietor. Often, the company paid rent for the use of the property and received a Corporation Tax deduction for the amount paid.
An attraction of this arrangement was that if the property was subsequently sold it should have attracted Taper Relief of up to 75%. Sadly, the payment of rent will jeopardise full entitlement to Taper Relief’s replacement; Entrepreneurs’ Relief of £5 million each, costing up to £1,800,000 in Capital Gains Tax.
Since 6 April 2008, where the company pays any rent to the owner, the period from 6 April 2008 will not attract Full Entrepreneurs’ Relief. However, Entrepreneurs’ Relief will be available in full for all years prior to 6 April 2008 even when rent has been paid. The implication of this is that for every subsequent year, Entrepreneurs’ Relief is being diluted.
If the intention is to sell the business in the near future, simply stopping the payment of rent also stops the dilution of Entrepreneurs’ Relief on the subsequent sale of the property which triggers a chargeable event for Capital Gains Tax purposes.
Although anyone who is non UK resident may be able to escape UK Capital Gains Tax entirely, for the rest of us, regardless of whether the property is situated in the UK or not, any gain in excess of £20,200 per couple will be taxable.
To avoid Capital Gains Tax on the asset completely, for most of us, death is the only option. However drastic, even this does not get us out of paying tax completely as Inheritance Tax may then be due. The best succession planning is usually to act in advance and whilst the legislation is known. Under current rules, commercial property may qualify for Business Property Relief, reducing the amount chargeable to Inheritance Tax by up to 50%. Better yet, there may be scope to pass the asset on now so that after 7 years, it has completely fallen out of the estate with no Inheritance Tax to pay on it whatsoever.
If a sale is not on the cards within the next few years, and succession planning is not a key concern at the moment, using annual tax free amounts should always be considered a priority.
Each year, a couple can receive a combined total of income and gains of £39,480 tax free. Sadly, most people do not use these allowances in their entirety and lose them as a result.
In some limited circumstances, careful structuring can ensure tax free allowances are fully exploited from commercial leases splitting the proceeds between chargeable gains and income which may assist in making full use of the available tax free amounts each year.
The sale or transfer of a property into a UK tax haven otherwise known as a pension scheme cannot be overlooked for income tax planning purposes. Contributions to a Self Invested Personal Pension (SIPP) or Small Self Administered Scheme (SASS) may attract income tax relief of up to 60% and offsets the gain which will be taxable at a rate between 10% and 28%.
In addition to this, any growth in the value of the asset will be tax free within the pension scheme and after reaching the age of 55, a lump sum of up to 25% can be withdrawn from the pension fund income tax free. As an added bonus, the rent payable by the company would attract Corporation Tax relief but the rent receivable by the pension provider would not be taxable within the fund.
The coalition government has signalled it is considering reducing the maximum amount of pension relief an individual can claim each year to the region of £30,000-£45,000, from the current £255,000. If this were to happen, there may be scope to put a proportion of the property into the pension fund each year to ensure maximum relief is obtained.
As with all tax matters, the most suitable arrangement must be assessed on a case by case basis as there are many factors that will be relevant to establish the best possible structure.
It is vital to keep informed of any changes in the tax system and assess whether they impact upon any current arrangements or open up new possibilities.