Sole-trader renting commmercial property from himself & spouse.

Sole-trader renting commmercial property from...

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I have taken on new client who operates as a sole-trader. (Busy architect practice with five employees including spouse who does all the office admin)    

The business operates out of office premises owned by the sole-trader and his spouse and pays rent of £18k per annum for the office premises. 

On odd occasions when there have been cash flow difficulties in the business the rent has been 'paid' by way of an adjustment against capital introduced  : Dr Rent / Cr Capital Introduced.  

Previous agent treated the full cost of the rent as a tax-deductible expense of the business (no add-back in tax computations) and each spouse declares their half share of the rent as property income.

My instincts tell me it cannot be correct for a sole-trader to rent premises to himself (issues surrounding Class 4 NIC if nothing else) but client is not too happy that I have raised this as questionable saying previous agent never had any problem with this and there is no question of the rental income not being declared in full.

Can anyone point me in the correct direction to check the legislation for this.  

Replies (6)

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By gbuckell
29th Jul 2014 11:14

Property law

I had an issue over this point with HMRC many years ago. I was renting a room in my residence for use in my sole trader business. I paid the rent to my wife although the property was jointly owned (based on some commentary in a HMRC press release connected with rent-a-room relief. My wife then claimed exemption on the rent under the rent-a-room scheme.

HMRC argued that, as joint owner, I had rights of occupation in the property and therefore could not pay rent for something I already had. I discussed this informally with a property lawyer who agreed with HMRC's view.

I think it was just a sneaky argument to avoid the debate about whether rent-a-room relief could be claimed for office accommodation. Later I operated as a company ad recommenced paying rent. HMRC then went quiet!!

So the short answer to your question is that rent cannot be paid to yourself but you will struggle to find anything black and white in legislation.

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By fiona_howells
29th Jul 2014 12:22

Another view

I can't see a problem with the business renting the commercial property off the sole trader & wife.  Re rent a room - I was under the impression this couldn't apply to income off companies.

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Replying to stepurhan:
By mrme89
29th Jul 2014 12:33

.

fiona_howells wrote:

I can't see a problem with the business renting the commercial property off the sole trader & wife.  Re rent a room - I was under the impression this couldn't apply to income off companies.

 

(1) A sole trader business is not a company.

 

(2) Rent a room relief only covers living furnished residential accommodation, and does not extend to rooms used solely as an office or business use.  Whos pays for the room is irrelevant. The relief is for the taxpayer who is renting the room.

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Replying to stepurhan:
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By Mr_awol
29th Jul 2014 12:47

Correct

Rent a room certainly isn't applicable to rooms let for business use (other than if your lodger does a bit of work from home admin in the evenings etc).

However that was a bit of a side issue - the OP was not, I believe, trying to claim rent a room in their case.  The question seems to be whether you can rent a property from yourself as a sole trader, to which the answer is "no".

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By L Haldane
29th Jul 2014 16:00

Thank you all for your comments, but I fear the posting has gone off track with the rent-a-room responses.

Can anyone give me a steer towards HMRC manual reference or other legslation to support the concerns I have for the allowability of the rental payments as a deduction from my client's sole-trader profits and to confirm the correct treatment for his spouse's half-share of the rent as joint owner of the commercial premises. 

 

 

 

 

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By Mr_awol
29th Jul 2014 16:08

Not quite the link you are after

But then again it is free ;)

BIM47820 contains the quote "A sole trader cannot charge a separate rent to his or her own trade.  This is because individuals cannot rent property to themselves."

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