Business Premises

You’ve decided to buy new premises for your business, however your hoping they will also become a good investment return, however as usual Tax may make this difficult...

One of the decisions for buying new business premises should be how much CGT (Capital Gains Tax) will be due when the building is sold. But to work out if the premises are worth buying you must first work out how CGT is calculated and whether it makes a difference if you or the company makes gain.

Company Purchase

If a company buys an asset, which it uses for several years in its trade before selling, then the gain arising is calculated by deducting the purchases cost from the net proceeds of sale. An allowance is also given (indexation allowance) which basically takes any underlying inflationary gain out of the gain. The RPI (Retail Prices Index) is used to calculate the allowance.

Example

If the company sells its business premises for £1,000,000 two years after buying it for £500,000 then the gain is £500,000 before allowing for inflation. If the increase in RPI over the period of ownership the CGT allowance reduces the gain by £1,000 (0.2% of £500,000). If the company pays corporation tax of 30% then there’s a potential company tax bill for £147,000 (30% of £490,000).

Personal Purchase

If you buy the business premises personally and charge an agreed rent the CGT liability is considerably reduced. This is due to the fact that an individual has access to a taper relief, which is a more generous tax relief, then the indexation allowance for companies. To get a 75% discount on the CGT you need to hold a business asset for 2 years.

Example

Using the same values as above you will notice a gain of £500,000 (£1,000,000 – £500,000) on the business asset. Therefore your tax liability before taper relief would be £200,000 (40% of £500,000) however with the maximum business asset taper relief available you could lower this from 40% to 10%, you would now have a personal tax bill of £50,000.

Advice

A new purchase is better suited to personal ownership then corporate ownership. Someone could be setting up a new business that needs business premises or have an existing company that is thinking of acquiring business premises. When an asset is acquired as part of a scheme to defer CGT then the advice doesn’t apply. You should also check this personal investment doesn’t affect your Inheritance Tax plan.

VAT

Sales of commercial buildings that are less then three years old are standard rate (17.5%), beyond this the seller is exempt from charging VAT. It is also an option for a landlord to charge VAT on rent, this will give certain benefits in claiming input VAT in connection with the property. If this option has been exercised then VAT must be charged on the sale, however you must remember VAT when drafting the sale agreement otherwise you may end up having to pay the VAT yourself.