There are many ways for the directors of a business to buy its premises.
Below we will look at the benefits and drawbacks of the main ways.
- If the company buys the property, it does not affect how the director’s pensions are invested in any way.
- If the company owns the property, there will be no rent to pay, only interest on any debt.
- The business should be able to use this interest to reduce its tax bill which a pension would not be able to do.
- VAT issues will be more easily handled with the company framework.
- At current very low interest rates, using corporate cash to fund a deposit on the property purchase should produce a better investment return.
- The property would be available to the company as future security for loans.
- A company may be able to borrow more than a pension could.
- Keeping the property in the company means it may not have to be sold if a director leaves the business for whatever reason.
- There is no tax on the death of a shareholder (inheritance tax (IHT)) on the property provided it is used only for the purposes of the business.
- Although the company will have to pay corporation tax on any capital gains resulting from the sale of the property, it has the benefit of indexation allowance up to 31 December 2017.
- In addition, various reliefs can be used to delay the tax.
- There will need to be substantial cash (or non-property related borrowing facilities) in the company to put towards the property purchase.
- This will reduce the cash reserves of the business which has become more valuable in recent times.
- According to Funding Options, the deposit amount for a commercial mortgage is usually between 25% and 40%.
- When it comes to owner-occupied mortgages, rates can be anywhere from around 2.25% to 18%.
- As the property owner will be the company, the property will be vulnerable if the company fails whereas in a pension scheme it would generally be protected.
- Potentially, tax on any gain will be paid twice, once by the company and again personally when the company is sold.
- By buying the property, the company could be stopping a pension plan holding a high-income paying investment, on which no tax is payable from the income.
Purchase by directors
- The property can be kept outside the company if it is sold in the future and it could be used to increase income in retirement.
- Property can usually provide a high income if required.
- Drawing rent is a national insurance (NIC) efficient means of taking out income from the company.
- There is no need to charge as much as the market rate for rent, as there would be with a pension purchase.
- If the property were held personally there would only be capital gains tax (CGT) to pay on the sale.
- The rate would be 18% to the extent that capital gains fall within the director’s basic rate income tax band and 28% on anything above that.
- However, entrepreneurs’ relief could be available if the sale of the property is an associated sale (i.e. broadly at the same time as the sale of the business).
- This could reduce the effective tax rate to 10%, but j=how much is available could be reduced if any rent had been charged to the business.
- At the level of full commercial rent, there would be no relief available.
- Interest on the loans could be used to reduce the income tax on the rent.
- Directors may be able to borrow more than a pension scheme.
- The directors may be at risk because of the personal borrowing to finance the purchase.
- If interest costs rise above the rent, the directors may have to cover this themselves.
- There could be difficulties on the death of one of the joint owning directors or if one wants to sell up for any reason.
- Only a director who has a controlling interest in the company will be entitled to IHT business assets relief on a property which has been owned for at least two years and then at 50%, not 100%.
- A specific property may not be an appropriate investment for the directors.
- The directors may become involved personally in VAT if the property is subject to VAT.
Purchase by a pension (SSAS/SIPP)
- If the property is sold in the pension, there is no Capital Gains Tax liability.
- The capital growth on the property does not increase the value of the director’s shares for tax purposes.
- If there are younger directors in a multi-member pension scheme (SSAS), it may be possible to keep the property within the pension when older directors chose to draw benefits.
- This will depend on these benefits being met from other scheme assets.
- The rent paid by the company to the pension reduces its corporation tax liability.
- The rent is received tax-free by the pension.
- The property is protected from creditors, provided the property purchase was not done to defraud them.
- There will usually be capital available in the pension scheme to fund part of a purchase. This may not be available elsewhere.
- The property can potentially remain in the pension into retirement and beyond as the current death benefit rules offer the possibility to leave a property untouched in the pension arrangement after the member’s death.
- Where the pension fund is buying the property, and this has been built up out of pension contributions, there is effectively tax relief on the purchase of the property.
- The death, ill-health, leaving service or early retirement of a scheme member could force the pension to sell the property or take out a loan to provide the benefits.
- This sale or additional borrowing could come at an inconvenient time.
- Forced sale difficulties could happen where the directors of the company fall out and the company’s premises are owned by their pension arrangement(s).
- If the property represents the main asset of the pension it could be a poor investment strategy.
- The maximum the scheme can borrow is 50% of net assets.
- The £40,000 Annual Allowance limits the scope for paying in substantial amounts into a pension to help fund the purchase of property, although carry forward may offer some help.
- Often a way to fund property purchase is transferring other pension plans, e.g., from personal pensions.
- This is clearly a route which needs to be treated with appropriate care.
- The property cannot be used as security for future loans to the company.
- The company would have to always pay the same rent which would be due on the open market rent to the pension.
- The property will need to be valued, e.g. when statements of benefits are given, benefits are drawn, or loans are considered.
- On each such occasion, this will carry a cost.
- If the pension has borrowed to purchase the property, interest on the loan will not qualify for tax relief as the scheme does not pay tax.
- The scheme will have to register for VAT if the property is not VAT exempt.
- The scheme can purchase the property from the company or scheme member(s), but any such purchase must be on arm’s length.