Property retained outside the business

Where assets such as land and buildings used in the business are retained outside the company, the payment of rent by the company to the property owner is a means of extracting profit from the company. Although it is taxable, unlike salary, there is no national insurance liability.

It should be noted that the payment of a full commercial rent by a company will deny the shareholder-director any entitlement to Entrepreneurs’ Relief when the land and buildings are sold.  This applies to rent paid after April 2008 only, as rent charged before this date does not affect Entrepreneurs’ Relief on a post April 2008 disposal.

If a rent is not paid then a disposal of the property must take place at the time when the property owner sells his/her remaining shares in the company (at a time when he/she holds at least 5% of the ordinary share capital). The property does not have to be sold to the purchaser of the shares and could be sold to an unconnected third party.

Switching the property into the trading company will attract Stamp Duty Land Tax on the value of the property. It should provide future protection against Inheritance Tax however, as 100% business property relief should be available in respect of the shares.

Retaining the property outside the company allows flexibility should the property become surplus to requirements and the owners wish to let it to a third party. Inside the company there is a risk that this would deny Entrepreneurs’ Relief on the value of the shares as letting the property would usually be a non trading activity. This would compromise the trading status of the company and potentially deny relief on the shares. If you would like us to review your specific circumstances, please get in touch.

May 2009