Tax efficient borrowing
Oct 06 2006
The decision to buy or rent premises for a business should take into account a number of factors of which tax is only one. A major consideration is the likely success of the business. Around a third of new businesses cease to trade within three years. If you purchase a premises and the business does not work out, you may be stuck with a long term commitment because of the premises. So decisions to buy premises should not be driven by tax considerations alone.
If you lease a building the rental costs will be allowable as a deduction against the business profits as would any other costs incurred as a result of a lease agreement. If you purchase the building, and ownership of the building is in the same legal entity as the business, the financing costs of the premises would be an allowable charge against the profits.
Alternatively, particularly if the business would not occupy the whole of the premises and part of it would let to other parties, it might be more advantageous to keep the business and the premises separate. So the business might be a limited company whilst you own the property, although this means the mortgage would be with you as the property owner. There would also be an issue about how much rent the business would be charged.
There would be a potential Capital Gains Tax liability when you came to dispose of the premises, although there is an annual exemption (£8,800 in 2006/7) and “taper relief” for assets owned for each complete year dependent upon whether the premises is a business asset or a non-business asset. The maximum period of taper relief is 10 years for non business assets (60% of gain chargeable) and 2 years for business assets (25% of gain chargeable).
There are some VAT matters to consider as well. Is the turnover of the retail business over £61,000 a year? Is the vendor registered for VAT? Will the business or part of the business be a TOGC - a transfer of a going concern (as seems likely)? If the freehold is going to be separated from the business and supplied to the individual will VAT be charged on the sale of the premises? (That is, has the vendor opted to tax the building?)
If the freehold is not subject to VAT when sold separately, it may be possible to acquire the rest of the business in the company as a TOGC provided the purchaser company is registered for VAT at the time the transaction takes place. Where part of the assets of a business is transferred the transaction will be treated as a TOGC only where the assets transferred are capable of being operated as a business. There may be a problem where a retail business is transferred without the premises and it would be wise to obtain a ruling from HMRC.
Presumably the premises will be let to the company. If VAT has to be charged on the sale of the business it should be recoverable if the purchaser company is registered and the business is solely concerned with making taxable supplies.
Anyone considering purchasing or leasing premises should take legal advice and consult a chartered accountant about the tax considerations.
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