Personal v company ownership

Personal v company ownership

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My client, a trading company with annual profits of £200k is considering purchasing a new office building which the company will move to. The two shareholders have asked for advice on whether they should buy the building personally or through a limited company (either the existing one or a new company). Their solicitor has advised that "everyone" is now using LLPs to purchase property. Apart from limited liability are there any other advantages in using an LLP? Also, a Jersey registered company has been mentioned - would this be taxable in the UK on rental income from the building? Finally, would there be any merit in setting up a pension scheme to purchase the building?

SAC

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By User deleted
07th Feb 2007 21:21

Building Purchase
It depends on the client's plans, objectives and likely increase in the value of the building.

Buying the building through the company will improve the company's balance sheet. The company can claim IBA though this is not significant. The problem comes when the company comes to sell the property as it pays Corporation Tax on any gain it makes. Indexation Allowance may not offer much relief here. Any significant gain could be taxed at 32.5% since the company's profits are already approaching the marginal rate.

Alternatively, buying the property by the individuals will secure Business Asset Taper Relief (assuming its use remains the same or similar) and Annual Exemptions on the eventual sale. This could mean a substantial CGT saving where a large gain is predicted. The property can be leased back to the company. Rental income will be taxed on the individuals but expenses including mortgage interest can be offset against this income. Care should be taken to avoid triggering a SDLT liability on creation of the lease.

The property could be purchased through a company pension scheme (SIPP). Once held by the pension fund, the property will be free from CGT on any gain and Income Tax on rental income. Downside is that the fund cannot be access until the individuals are 55+. 25% of the fund can be drawn down at this point tax free. The pension fund can only borrow 50% of its fund - therefore, if the pension fund has nil value, a contribution of 66.67% of the purchase price would have to be put into the fund in order to fund the purchase of the building.

With regard to LLPs, the advantages are:
- for tax purposes it doesn't exist, so individuals taxed in the same way as if they owned the property themselves. benefits explained above.
- limited liability, which could prove useful if something untoward happens and the value of the property falls below the borrowed amount (ie negative equity) or for example if there is an uninsured loss.
- change of ownership can be easier since new partners can be added and partners removed easily. the deeds remain in the LLP name since it is a recognised legal entity. SDLT may still apply depending on the value transferred.

With regards the Jersey registered company, UK Tax would be payable on the UK rental income and gains as the property it is assumed is located in the UK.


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By User deleted
08th Feb 2007 13:44

Thank you for your comprehensive reply. I think the client will go down the LLP route. If however they decided to acquire the building through a new company which would then rent it to the existing trading company, would the shares in the new company qualify for BATR & BPR. I think not as company is not carrying on a trading activity but perhaps someone could confirm this?

I appreciate that forming a new company would affect the rate of corporation tax.

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By User deleted
08th Feb 2007 14:28

Recent case
Think there was a case in 2006 sometime which held that co WAS carrying out a trade even though all it was doing was renting out a commercial property (and income taxed under Sch A). Have tried to look for the details but cannot find them so cannot comment on the specifics. Ring any bells with anyone else??

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By flurrymc
08th Feb 2007 15:24

IHT?
Another matter your clients may have to consider is inheritance tax – if the property is bought outside the company it will not qualify for Business Property Relief – if it is bought within the company the shares will continue to qualify for 100% relief.

Also how is the purchase to be financed, if it is by loan to the shareholders then if they buy the property the interest will only be allowable against income from the property if they lend the money to the company the interest will be allowed against all their income under s360.

More questions than answers I’m afraid.

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By The Minion
19th Feb 2007 16:38

couple of points
Does anyone else remember an article in Accountancy some time ago that said that owing land in an LLP was a collective investment scheme and therefore a no no?

Also when you have a hybrid partnership (humans and non humans) there is a possible problem getting FYAs because that particular structure isn't in the acts?

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By KristianPotts
14th Feb 2007 11:22

Capital Allowances
A previous responder mentioned IBA's, however these may not apply dependant on your trade and other factors concerning the building itself.

Other Capital Allowances may have some bearing on your prospective purchase however, with 'Plant & Machinery' allowances available when purchasing a building to be used in the course of your trade.

Typically a reasonable specification office building may attact as much as 30% or more of the purchase cost in 'Plant & Machinery' Allowances, a significant amount of which may be written off over a relatively short period.

As an example: -

£2,000,000 Office Building purchase (including land) would enable a writing down of some £600,000 (assuming 30% dependant on specification and land value).

An SME could benefit from 40% First Year Allowances (allowing a deduction against profits of £240,000 in year one, followed by 25% Writing Down Allowances on a reducing balance in subsequent years, effectively writing down some 95% over a period of approximately 9 years. If the company has significant taxable profits this is an extremely effective way of using your investment to significantly reducing your tax liabilities for a few years.

Providing the purchase is not made by a pension fund, Capital Allowances should be available regardless of the vehicle used to purchase it

If you would like some advice on this issue or an estimate based on your prospective purchase price please email me ([email protected]) and I will be happy to discuss further.

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By Paul929
20th Sep 2007 13:15

LLP advantage for property purchase?
We are currently considering advising that the purchase of a commercial property be made through a LLP ( two individuals plus their company would be the partners). Following Jessica Hart's recommendation our main concern is that to direct the rental income stream totally to the company and vest the ownership of the property in the two individuals runs foul of the usual rule that the income stream from an asset belongs to the owners of the asset.
Would shared ownership and a related shared income stream be more acceptable for tax purposes even though that meant giving up some of the advantages that Jessica Hart mentions but still gives some business asset taper relief and lower company tax rate on rental income. Still a better result than choosing either solely the individuals or solely the company for the purchase.

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