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capital gains tax

You own the property that your company trades from for which it pays you rent. This can be income tax efficient but might result in extra capital gains tax if you sell the property. Might stopping the rent save you tax in the long run?

Income tax, NI and BADR

When maximising tax efficiency there’s usually no clear-cut answer as to whether it’s better to charge your company rent for using a property you own or not. On the one hand, rent you receive from your company isn’t liable to NI, unlike salary. Also in favour of rent is that your company can claim a tax deduction for what it pays you. On the other hand, charging rent results in full or partial loss of capital gains tax (CGT) business asset disposal relief (BADR), which at current tax rates can save you 10% on any gain you make when you sell the property.

Example - income tax. Danny is a higher rate taxpayer. He owns the premises from which his company, Acom Ltd, trades. It pays him the full market rent of £2,500 per month. Acom also pays the property running costs. The net annual cost of the rent to Acom is £24,300 (£30,000 - 19% corporation tax (CT) relief, assuming the small profits rate of CT applies). Danny’s net income after tax of £12,000 (£30,000 x 40%) on the rent is £18,000. Compared with Danny receiving a dividend (usually the most tax-efficient way to extract profit from a company) equal to the rent he’s better off by nearly £1,600 per year. This illustrates the tax-efficiency credentials of extracting income as rent, but the trade-off is the loss of BADR.

Note. The CT relief on the rent will be greater if Acom’s profits exceed the small profits threshold (£50,000 for 2024/25).

Effect on BADR

By charging Acom full market rent Danny loses all the BADR for any gain he makes when he sells or transfers the property at the same time he sells or transfers some or all of his shares in Acom.

Note. If he only charged rent for part of the time he owned the property the BADR is only reduced for that period. Danny’s dilemma is that he doesn’t know if and when he’ll sell or transfer the property, or if he does how much gain he’ll make and whether at that time it will qualify for BADR. However, we’ve made some assumptions in the example below to illustrate what the loss of BADR caused by renting the property might cost Danny.

Example - BADR. In March 2025 Danny sells the property (which he’s owned for ten years) and his shares in Acom and makes a capital gain of £100,000. However, assuming he charged Acom rent for the whole time he owned the property and has no other capital gains or losses for the year he’ll pay CGT of £17,540 ((£100,000 - £12,300 exemption) x 20%). If he had not rented the property to Acom and the gain qualified for BADR his CGT bill would be £8,770 ((£100,000 - £12,300 exemption) x 10%). BADR saves Danny £8,770 while charging rent instead of taking income as dividends over the same period saved him £16,000.

Tip. The factors for determining whether income tax savings outweigh the loss of BADR are many and varied, plus it requires guessing what future changes there might be to tax rules and rates. However, it’s worthwhile crunching the numbers as it will probably provide a good indication of which option is most tax efficient

In conclusion

There’s no definitive answer to the question of whether charging rent is more tax efficient than not. Use your best judgement to estimate the factors and then crunch the numbers. This will give you a good indication of the best route. An advantage to charging rent is that, unlike with BADR, income tax savings begin immediately.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.

4th Oct 2024 08:44

Commercial Property Capital Gains Tax

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