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How much can commercial rent be ?

Can a company be charged a high commercial rent when owner of property is director of the company?

Hello all

My clients are a couple who have the chance to buy ( on expensive mortgage) a commercial property . They will buy this as individuals. This property has 2 - 3 tenants using rooms as treatment rooms for businesses. One of these businesses is a  XXX limited company where one of the couple is sole director.

My question is :

Can the couple charge a high rent to XXX ltd company to cover their personal commercial mortgage costs and also effect a large cost to XXXltd thereby reducing corporation tax on this  company.? The business does occupy more rooms than other tenants and has better facilities but the rental charge could be seen to be way above any "market rent" that other tenants may be charged

Can they charge what they like? Or is this too easy?

thanks in advance

Sally

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11th Feb 2019 18:11

Yes - too easy.

In theory, at least, HMRC could contend that part of the rent was not paid for the purposes of the trade and disallow it for Corporation Tax.

Best to have some contemporary evidence to counter this, such as an estate agent's letter suggesting a fair rent.

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By Sally26
to lionofludesch
11th Feb 2019 18:26

hello Liono
Thanks for alerting me to this. So establishing what would be reasonable for purposes of trade seems to be key. Perhaps I need to find a reasonable and friendly estate agent

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11th Feb 2019 18:15

They can charge what they like to whom they want. It’s a free country.

You would then need to determine what portion of the exhorbitant rents are allowable in the company’s tax comp.

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By Sally26
to Tim Vane
11th Feb 2019 18:24

Thanks Tim
So the issue seems to be what would be deemed allowable in a corp tax comp....?
Mmmnnnnnn I will ponder on

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11th Feb 2019 18:19

I'd be a bit careful. A company called XXX Ltd where "tenants using rooms as treatment rooms" sounds very dodgy. Could be living off immoral earnings?

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By Sally26
to Accountant A
11th Feb 2019 18:22

Ive enjoyed some of the treatments myself actually - quite above board I assure you !

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11th Feb 2019 19:04

As well as the CT point that Lion and Tim make, there are surely personal tax implications for the director

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By DJKL
11th Feb 2019 19:47

Are the other tenants being charged a market rent, working the figures against the other rents could be ill conceived if they are themselves adrift from market rent?

Consider the forms of tenure, FRI,IRI or serviced accomodation re services when evaluating what the rents ought to be.

Get some local evidence for similar on a sq ft basis, though be careful if retail as all retail sq ft are not worth the same, depth of unit and ratio of depth to frontage comes into play.

If you get an indication in writing from a local surveyor of the comparables in the area that may assist.

What sort of valuation did your clients get upon purchase? Was the property valued on a vacant possession basis or as an investment property and is there an indicative ERV ,if the latter, that assists?

If all else fails what would the overall rental ,if all let at the figure per sq ft proposed, bring out as initial yield, certainly if much over 10% you are possibly pushing things (even for tertiary with short term lets), I have ours at between 7% and 12% but the higher rate headline rents are for serviced studios where we as landlords supply H & L, we cover insurance, toilet rolls and hand towels re common toilets , cleaning of common areas and tenants merely pay rent, rates (if any) and water charges (usually just surface water and roads)

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11th Feb 2019 20:07

Also bear in mind, this exorbitant rent is income in the hands of the director.

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to SteLacca
11th Feb 2019 20:35

Not a problem if it's rents, but is it rents? That was any point above, though I can forgive you for not realising that - I seem to have lost the ability to write basic English since January.

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By Sally26
to Tax Dragon
11th Feb 2019 22:29

Yes the exorbitant rent will be covered by the equally exorbitant mortgage interest which was why I was thinking it was a good idea. I had a spreadsheet and everything ........working out the best option. Hee hee what fun was had by all.
Thanks everyone ! All ideas welcome

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to Sally26
11th Feb 2019 22:36

My communication is even worse than I realised. Did you miss my point too?

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By Sally26
to Tax Dragon
12th Feb 2019 09:51

good morning Tax dragon...... I think I must have missed it - please make it again in a different way?
thanks
Sall

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12th Feb 2019 11:10

@ Sally26 (OP).

I am most concerned particularly by your reference to the “exorbitant” monies (your post at 22.29 on 11 February 2019 refers- the fact that the director is in turn subject to “exorbitant” mortgage interest is simply not relevant) payable by the company to the director. Aside from the taxation consequences, but in some respects inter-linked therewith, I would respectfully suggest your carefully considering the Companies Act 2006, especially Sections 170 onwards, with reference to potential serious breaches thereof.

Here is a link to Section 173.

https://www.legislation.gov.uk/ukpga/2006/46/section/173.

I can envisage circumstances under which the director and/or the company could be at great risk from the “exorbitant” nature of the payments to the director. It follows therefrom that any professional advisor who has given advice on, and/or failed to give advice on, breaches of the Companies Act, is also at great risk.

Basil.

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By Sally26
to fawltybasil2575
12th Feb 2019 14:45

Thankyou Basil ! This is just why I am on this forum where people such as yourself are prepared to share knowledge and expertise. I knew in my bones it was too easy..... but didn't really know where to start in getting to the nub of things.
Thanks a million
Sall

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By cfield
13th Feb 2019 13:18

Charging a rent higher than market value would be a bad move as the client would be taxed on the full rent whilst the company could be denied relief on the part not justifiable as a trading cost (i.e. way over MV).

You also need to consider the capital gains tax position. The building would be eligible for Entrepreneurs Relief on a future sale as an associated disposal (if he sells his shares too) but this will be restricted if rent is received from the company the disposal is associated with.

If the rent is market value or higher, the ER restriction would apply to 100% of the gain. If it is below MV the restriction would be pro-rata.

However, the changing tax landscape makes planning for this a constantly moving target. For instance, the dividend tax now makes rent generally more attractive than dividends. Likewise, the CGT rate on commercial property fell from 28% to 20% so this makes 10% ER relatively less valuable. Therefore, you need to look at all this in the round.

You also need a crystal ball as CGT is always changing and ER may not be around for ever. CGT rates are now historically low but may go sky high if there is a change of Government.

Lastly, never let the tax tail wag the investment dog. Business decisions should generally be based on return on investment rather than the tax on those returns. Tax planning always comes second to that.

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14th Feb 2019 11:14

I pose this as a question to the poster and others. Would it not be easier for the trading business to buy the property, no doubt with a directors guarantee?

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By Sally26
to pauljohnston
14th Feb 2019 17:40

I've looked into this a bit but would welcome any input?
The property is for the couple to have as their joint pension but the trading company is her's alone and she would prefer to keep that separate. When I looked I found advantages in having it a joint private ownership .... but I may be missing something?

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