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bigduckontax, Accountant
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I am looking to invest into a commercial property which we

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I am looking to invest into a commercial property which we aim to turn into a restaurant driven boutique hotel. The asset is currently worth £150k and I will be investing £150k + to bring this up to a working condition. When it is completed it will be worth around £500k as an empty building and nearer £800k as a working business. My question is:
• From a tax perspective should we wish to sell this in the future, is it more tax efficient to buy the asset personally or to put the capital into a company and buy the asset through the company? (I am a higher rate tax earner c£150k from my job and my partner will only be working for our new business so probably won’t be able to take a wage until we are profitable). What are the tax implications of both ways?
• I assume if we buy personally, we will be hit with the personal 20% CGT liability, when we come to sell with no tax offsets to minimise this down.
• Also there is the question of the tax implications of the rent the company will need to pay us as individuals if we buy the asset and rent it to the company, will I have to pay the highest tax rate?
• Also would we be able to take benefit of any reliefs that are available for small business owner?
Any advice?
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. If you buy personally you will be subject to Capital Gains Tax (CGT) on sale on the gain made. This would effectively be the net disposal price less 300K acquisition price. Assuming both you and your partner participate that would be 100K gain each. After your Annual Exempt Amount currently 11.1K you would have a CGT on 88.9 at either 18% or 28% or a combination of the two rates depending on individuals' income in the tax year of sale. Worst case scenario is a bill of say a tad under 30K. However, on cessation and sale you would almost certainly be entitled to Entrepreneurs' Relief which limits CGT to a flat rate of 10% Companies are not subject to CGT any gains or losses being passed through the trading account and subject Corporation Tax (CT) at 20%. There is no Annual Exempt Amount, however. If the company which rents the asset from you then any rental paid would be taxed at the individuals' marginal rate of tax. Have a look at Business is Great's web site here for possible tax reliefs: I hope that I have covered all the points for you. Don't hesitate to follow up on this thread if you have further queries.
Customer: replied 1 year ago.
Thanks for the response. I have a few further questions, so please bear with me.
• If we buy the building personally, I believe we can lend the asset to the company to avoid having to pay the higher rate of personal income tax on the rent we would receive? What are the rules about lending the asset to the business to keep in line with IR requirements?
• I believe if we did rent the building to the business we only need to pay the tax on the profit made on the rent which would be 100% currently as there will be no mortgage, but if we did take a mortgage at a later date, we can offset the mortgage interest and set the rent to equal the mortgage interest therefore no tax liability. Can we switch between lending and taking rent without being penalised?
• It will be the intention to sell the business at a later date, if the asset was held personally would there be different tax rates for selling 1) the business as a going concern and 2) the personally held building at the same time? Does it make sense for the business to own the property and sell it all in one package from a tax perspective? As mentioned previously, the business and building combined would be around £800k - £1m, so a capital gain of £500k - £700k. What is the best way to minimise the tax paid on the gain?
• What are the tax implications of transferring the building to the company at a later date to allow us to sell as per the above example?
• With the Entrepreneurs' Relief limiting CGT to a flat rate of 10%, if we had lent the building to the business as per this page and then decided to sell the business and the building, would both be covered by the Entrepreneurs' Relief. Eg, 10% of the 500k - £700k capital gain or does it need to be a package?
Our current accountant (not a tax specialist) told us that if the company owned the building, then we would pay 20% corporation tax BUT the money is then stuck in the company and you are like to pay 25% tax to extract it. Does the account for the Entrepreneurs' Relief tax?
Loaning to a company by directors and others is perfectly normal. What will get you into hot water very quickly is companies loaning moneys to directors! There is no tax involvement here unless the company pays you interest on the loan. In that case the interest is subject to Income Tax (IT) in your hands. Mortgage interest only can be set against the rental income. Repayment of the capital element cannot. If the building is held personally then, as I explained in my original answer CGT would apply, but probably with Entrepreneurs' Relief and limited to 10%. The fact that you lent it to the company would be irrelevant. Contractor UK has the following advice regarding a company's entitlement to Entrepreneurs' Relief: 'To qualify for Entrepreneurs’ Relief, the company must be a trading company for at least the 12-month period up to the date of cessation of the trade. It is then necessary to wind up the company within three years of the cessation date to qualify for ER.' An 80/20 test is applied to see if a company is trading ie 80% of its activities must be from the trade. There is always a problem extracting moneys from a company where capital gains for example have been subject to CT at 20%. Such moneys would count as remuneration in your hands and be subject to IT at your marginal rate. Furthermore, if you are directors, it must be paid through PAYE channels. I think that has covered all your follow up questions. Please be so kind as to rate me before you leave the Just Answer site.
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