Holding a property outside of the trading company in which it is used is not an uncommon structure. There may have been commercial reasons for structuring in this way, however, the tax consequences of doing so should also be considered.
Tax considerations
A future disposal of the property would result in the individual being liable to tax on any capital gain realised. Entrepreneurs’ Relief may be available such that the gain would be taxed at a rate of 10% as opposed to 28% but complex restrictions first need to be considered. For example, all or part of the gain may not be eligible for the 10% rate where the individual has historically received rent from the company for the property and/or if there was any non business use of the property.
In addition, legislation has been introduced in the latest Budget such that a disposal of a property held outside of the company would also need to be accompanied by a disposal of at least 5% of the shares in the company to qualify for Entrepreneurs’ Relief.
Income tax would be due on any rental income received for the property whilst holding it outside the company and it would also form part of the individual’s estate which could lead to a 40% inheritance tax liability on death (depending on the availability of any reliefs).
Selling the property to the company may result in the company owing the individual money which could later be extracted free of tax. In addition, the shares held by the individual in the company should not be subject to inheritance tax in the future providing certain conditions are met.
Any transfer of property to the company would need to be weighed up with any taxes imposed as well as any other commercial reasons for holding the property outside of the company. There may be opportunities to structure the transfer of the property to the company such that any capital gains tax and stamp duty land tax (SDLT) liabilities are minimised and in some cases reduced to nil.
Where we can help
If you hold a property outside your trading company, we can assist by undertaking a review of the most tax efficient holding structure. We can also advise on any tax implications of transferring the property to the trading company and obtain advance clearance from HMRC on the SDLT position where appropriate.
We have recently secured a tax saving of £260,000 for one client after gaining agreement from HMRC that no SDLT was due on the transfer. Their incumbent advisers had informed them that the full £260,000 liability was due; needless to say they were glad that they asked for a second opinion!