An Alternative Way of Buying Commercial Property – A Limited Company
There are various tax issues which should be considered when undertaking a commercial property purchase. A key question is how to undertake any such purchase? Of course this may be made personally, however, one should carefully examine the options to acquire via a Limited Company or through a pension via a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS). Here we will take the opportunity of examining in some detail the option of utilising a Limited Company for the purpose of a commercial property purchase.
You may either form a new company and provide it with initial funding to make purchases or, where already in business, utilise an existing company. Either are valid options but one should be aware of the associated company rules where the purchase of property via a separate company is being considered. Where a shareholder enjoys control, either directly or indirectly through a spouse or family, of more than 50% of two or more companies, the first £300,000 band of profit, that would normally be taxed at 21%, will be apportioned across the companies. Where two companies exist, only the first £150,000 of profit would be taxed at the lower rate, three companies £100,000, and so on. This should, therefore, be approached with caution, as lack of planning may give rise to a higher than necessary Corporation Tax liability on the combined profits of the companies in question.
Unlike personal ownership, there are formalities involved in operating as a Limited Company. Those formalities are set out in the Companies Act 2006. Shareholders and directors have different rights and responsibilities even if they are the same persons. Each year the company must file an annual return and submit accounts to Companies House, and the format of the accounts is governed by law.
In return for the formalities that go with incorporation, the shareholders benefit from limited liability and so creditors cannot seize their personal assets if the business fails. Many see this as a significant advantage as compared to direct ownership. This alone may influence some to consider this option.
It is important to consider the tax position as this can strongly influence the decision regarding the most appropriate method of purchase. All returns from property within a Limited Company will be subject to Corporation Tax. This is likely to be at a rate of 21% at the outset or 29.75% on profits in excess of £300,000. This compares with 20%, or more likely 40%, Income Tax on rents and trading profit or a flat rate 18% under the new Capital Gains Tax (CGT) rules on capital growth.
The use of a Limited Company grants the shareholder control over their personal income, and consequently tax liabilities. Income may or may not be drawn as appropriate and furthermore, dividends may be declared as opposed to salary or bonuses. This is effective in regards to both personal Income Tax and National Insurance and it is this control which may influence those already subject to higher rate income tax.
It is fair to say that there is no default option when it comes to commercial property purchase, as each will be appropriate to the individual circumstances of the purchaser. We would welcome the opportunity of discussing your specific needs and requirements and advising you accordingly. Please feel free to contact Peter Edwards in this regard.
Date of Article: 2nd December 2008
