
Tax Implications of Purchasing
property.
When purchasing business or
commercial property one should always consider the tax
implications. It is important that before purchasing a
commercial property one establishes the potential tax
liability. Note that the details below only provide to serve
as an outline and if you are in any doubt, it is recommended
that you consult a properly qualified tax advisor on the tax
issues raised.
Income Tax:
Rental profits from
commercial property are taxed in the same way as any other rental
income, whereby you pay income tax at 10 per cent, 22 per cent or
40 per cent, depending on your overall income level. You will get a
deduction against your rental income for general costs of running
the property; repairs, interest costs etc. If you set up a company
to run your property, the company will pay corporation tax,
probably at 19 per cent.
You do not get an annual
‘wear and tear’ allowance of 10 per cent on commercial property in
the same way as on furnished property that is rented out but
instead, you become eligible for a series of capital
allowances. The rates
of allowances vary: you will get 25 per cent (reducing balance) on
‘plant and machinery’ (which might cover various fittings in the
building) but only 4 percent (straight line) ‘industrial buildings
allowance’ on the buildings fabric, and, as the title suggests,
only if the building qualifies as industrial (so a shop doesn’t
usually qualify). This whole area of capital allowances needs
careful investigation if it is important to your
calculations.
Dedicated Buy to Let Mortgage
service
Capital Gains Tax:
Selling the property
will be a disposal for CGT purposes. The gain will be computed in the
normal way with no prospect of a CGT exemption parallel to the
‘main residence’ relief
There will be tapered
relief which can be a major advantage of investing in commercial
property, as there is the possibility of a 75 per cent CGT
exemption, for ‘business asset taper relief’, allowable after owing
the property for two years. To qualify you must have let your
property to a qualifying trading business. Examples include any of trade
carried on as a sole trader, a partnership involving at least one
individual or an unquoted company. Where your tenant is a quoted
company, this relief may apply if you work for the
company.
If the property doesn’t
qualify as a business asset, you will be inline for the less
advantageous non-business asset taper. That leads to a reduction in the
gain chargeable after the first three years of ownership of 5
percent each year to a maximum of 40 per cent, and base rate
taxpayers of 12 percent after the full ten years.
If you own your property
via a company, on disposal, there is no taper relief; instead the
company gets an indexation allowance and pays corporation tax (at
the normal 19 per cent, rate if its profits are below £300,000).
You may have GCT to pay on your shares in the company if you sell
them.
VAT:
Rents are in principle
exempt from VAT, so the usual starting point is that VAT is
irrelevant. However,
if you (or the company, if it owns the property) are registered for
VAT, you have the choice whether to charge VAT on top of your
rent. If you do, you
can recover VAT on the costs and expenses which relate to the
rents, such as building, renovating and redecorating
costs. Charging VAT on
commercial property rent is usually known as ‘exercising the option
to tax’. If your
tenants themselves are registered for VAT then they will be able to
recover at least some of this tax.
The problem comes when the tenants cannot
recover VAT in full, either because they are not registered
(perhaps their annual turnover is too low, or more likely, because
their business or profession does not attract VAT, such as an NHS
medical practice) or they are partially exempt (for example an
insurance business).
The stumbling block here is that you are unable to change your
option to tax: once exercised, it can’t be revoked for 20 years
though if the building is sold, the purchaser can start again on
opting. This
complicated VAT option requires care and professional
advice.
Commercial property mortgages
|
BTL Mortgages for HMO
property | Bridging
Finance 100% LTV | Self Cert Commercial
Mortgages | Development
Finance
|