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Commercial tenant to buy premises - best options?

Beauty company Ltd to buy premises from landlord- how to structure this?

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Good morning !

Could anyone point me in the right direction here? My client is a director of Beauty Ltd and has the chance to buy the commercial premises she has been renting for a while. She and her husband want to buy the property jointly. I understand that setting up an new company for this has negative issues as the tenant will be "connected". So what are the best structures to buy this property? If they set up a partnership would this bring up the same negative "connected " issues ? Can they simply buy it as a joint investment property ? What are the implications of these options? Can anyone see any pitfalls?

Thanks in advance



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01st Dec 2018 13:43

You need to think through what type of entity they wish to hold it (especially since Ltd Co indexation has gone), long term plans with it, which structures might limit future ER claims/ BPR considerations etc, vat issues re the purchase, etc, etc etc- lots of variables so lots of fact finding.

This all comes down to knowing your client, discussing what they are trying to achieve, working through possible future plans including exit routes and having a crystal ball;if in doubt with any planning follow the money.

Given the crystal ball is tricky to obtain and usually not that reliable the next best is the most flexible position that roughly fits with clients' current wishes, needs and aims.

Also do not forget financing- finance may be very closely linked re its availability and cost to which business type acquires; always remember tax follows the business decision, business decisions are merely influenced by tax considerations.

Thanks (2)
By Sally26
01st Dec 2018 14:39

Thanks for prompt reply DJKL
They are being offered business finance. Do they have to have a partnership or Ltd company or can they just accept this finance as individuals? They are looking at immediate savings primarily rather than a long term benefit.
Beauty Ltd is the main tenant in this property so does the "connected party" issue only come into play if they set up a company to buy it?
thanks again

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to Sally26
01st Dec 2018 17:13

Sally26 wrote:

They are being offered business finance. Do they have to have a partnership or Ltd company or can they just accept this finance as individuals?

Surely that's up to the lender. You need to ask them.

Thanks (1)
to Sally26
01st Dec 2018 17:19

If they need finance then they will obviously pay interest on same.

To relieve that interest for tax they need an source of income against which it may be offset, if the trade is distinct from the interest payable that possibly means merging both the property and the business into one beast or charging rent from property beast to trading beast. In addition distinct entities may give rise to Option to Tax vat considerations re refurbs/repairs etc.

If they own the property via say a partnership and rent it to Beauty Limited, the property may not (in the event of say its sale alongside a future sale of the shares in Beauty Limited) qualify for ER. (see example 4)

In addition if they have other rental incomes, either currently or in future, which are not within that partnership sideways relief re losses re these or those within said partnership could get tricky.

I might ask myself whether using the existing company is a benefit to them and if so measure extent/value of such benefit, consider if operating the trade via say a partnership or an LLP with the property also owned by said same partnership/LLP might be simpler re any future sale of the business/the property both- certainly simpler than a company re profit extraction.

The catch re planning is we have no idea re the future, but right now we have very low CGT rates on commercial property owned by individuals/partnerships but we still have the double tax charge of similar assets held through a company,with no indexation to soften the pain, accordingly I am not sure what, currently, a corporate holding vessel adds- however if say they are both higher rate taxpayers my views could modify.

I would be taking a close look at how beneficial the trade through the existing Beauty Limited really is and whether re future disposal and also vat simplicity, holding both the trade of Beauty Limited and the property within a partnership/LLP might be a better solution; however I have no access to likely marginal tax rates of the individuals involved so my thoughts are very superficial.

There is no one generic answer here, you need to crunch options, consider the myriad angles, report these to your client and ensure you covered all bases- the last thing you need is the client coming back in x years saying you never advised him re A,B,C & D .

You need to cover:

Relief for interest costs

Tax on future sale of property

Access to funds upon any future sale

Inheritance tax considerations re property especially re availability of BPR

Ongoing income tax issues re marginal rates now and in future.

Vat considerations both on purchase and in future re property and taking into account repairs etc and vat re same.

Ease of funding, guarantees that might anyway be needed etc, cost of funding depending who borrows.

Future plans of clients- might they in future want to sell business and property together, sell just business, sell just property or all of these as they have no idea.

It is impossible to give specific guidance on here, the above are the sort of data and factors and there will be others I might discuss with the clients:-

LBTT (up here), use of SIPP, small business Rates relief considerations if other commercial property already owned , the list is endless.

I would also give them a typed report showing I had considered and advised them re their options and they were aware of the plus points and minus points re each.

Thanks (2)
By Sally26
01st Dec 2018 17:27

That's a very comprehensive reply - thanks indeed for your time ..... I had been looking at all these factors and realising the complexity and with so many spinning plates etc starting to lose the will........ But I feel better as I recognise the issues you raise here - so I'm not overcomplicating - .......could it be more complicated? !
Hey ho - soon time for the G & T - cheers DJKL!

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01st Dec 2018 19:53

Could always toss a coin :-)

Thanks (1)
04th Dec 2018 09:47

Have you considered using a SSAP to buy the property? You will need specialist advice, but it is possible effectively to enjoy tax relief effectively for the cost of the property and the rent paid, whilst the SSAP enjoys the rent tax free.
If, which the question does not ask, major repairs or improvements were anticipated then by using a lease premium, most of the costs can also be claimed as tax deductible to the company- this is quite complex and details are not suitable for this forum

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