Purchasing your business premises

Whilst the slowdown in the commercial property market is evident to all, purchasing their premises is an attractive option for many business owners. An important question to consider is how should they go about it. There are three possible routes to choose, each with its own advantages and disadvantages:

In your own name

As an individual, you may be able to borrow more than a pension scheme (currently restricted to 50% of the net asset value). However, bank funding for a commercial property purchase can be difficult to obtain, particularly at the current time, and life assurance will normally be required. Funding will normally be subject to the grant of a lease to your operating company. This will give you rental income which can be set at a level that suits you and the company. The interest cost on any borrowing can be offset against the rental income, potentially making the property more affordable. Any gains will be subject to Capital Gains Tax.

The responsibility for maintenance of the property will rest with the individual, although this would normally be passed on to the company through the occupational lease.

From the company’s perspective, there will be no purchase costs, so freeing up cash for other uses. The rent paid will be an allowable expense for corporation tax. However, the company’s leasehold interest in the property is unlikely to give adequate security to a lender if the company needs to borrow money.

Through the company

This is probably the most common route and possibly the simplest, although there are initial costs that will need to be taken into account. Assuming the company is profitable, it is more likely to be able to secure finance than an individual. Once purchased, the property will be on the company’s balance sheet as an asset, giving security for future expansion. Although rent will not be payable, the company will be responsible for property maintenance. The cost of borrowing will be an allowable expense for corporation tax purposes.

A purchase through the company will reduce funds available for other purposes. There will also be issues to consider if the company is sold. Any profit on the property will be subject to tax and the directors will have a higher Capital Gains Tax liable on their shares as a result of the overall gain in value of the business by virtue of the property asset.

Via a pension scheme

Commercial property can be purchased using a Small Self Administered Scheme (SSAS) or a syndicated Self Invested Personal Pension (SIPP). The borrowing limit for each is 50% of the asset value. This means that there will need to be significant funds in the pension fund.

There are a number of tax advantages with this route. Payments made into pension funds attract tax relief so there will be an initial cost saving. Although the rent paid by the company must be at market rate, it will be tax free. There will be no Capital Gains Tax payable on a disposal of the property.

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