Options for structuring property purchase

Ask an expert
Options for structuring
property purchase
Our client is a successful trading company (Tradeco). It has
outgrown its existing rented trading premises and is
considering purchasing a freehold property, which it will do
using a mix of its own cash and bank funding. The property is
larger than it needs for its requirements, so approximately half the
building will be let to a third party. The company is owned 50:50 by
Mr X and his wife, who also works in the business. What options are
available for structuring the purchase?
Q
Historically, there has been a driver to
hold investment property outside a UK
corporate, because of the low CGT
rates for individuals. With the CGT
rate at 28% and the corporation tax rate at 20%,
there is now more incentive to hold in a company,
especially if the owners are happy not to distribute
all cash following a sale. Income tax on rents at
the top rate of 45% is a further incentive to hold
in a company.
Although Tradeco is highly successful, it may
nevertheless face business risks. It may therefore
prefer to ring fence the property from the business,
and not to hold the property in Tradeco itself.
This could be achieved by putting a new holding
company (Holdco) above Tradeco, and holding the
property in Holdco or a subsidiary of Holdco.
There are some tax advantages to holding
the property in the trading group (albeit not in
Tradeco itself):
! As long as the group retains its trading status,
shares in Tradeco will qualify for entrepreneurs’
relief (ER), providing a 10% CGT rate on sale.
A purchaser of Tradeco shares might require
a discount to reflect the latent tax liability on
selling the property, so this isn’t a complete
‘win-win’ against personal ownership.
! Business property relief (BPR) should allow the
Tradeco shares to pass to heirs on death or by
gift free of any IHT (IHTA 1984 s 104 and 105).
! Rollover relief is available (TCGA 1992
s 152/s 175), if the property is sold and
replacement premises or assets acquired within
the required timescales.
Here, the value of the part of the property to be
let to the third party is significant compared to
the business assets, including the trading part
of the property. HMRC does not automatically
regard let property as tainting trading status for
ER purposes, especially where the letting is part
of the trading premises (see HMRC’s Capital gains
manual at CG64085). However, the proportion
of the building being let is substantial, had been
acquired with a view to letting and had not been
previously used for the trade, with no plans to
do so. Therefore, there is concern about tainting
trading status.
A possible solution to the trading status
issue would be to hold the investment part of
the property outside the group, which might be
achieved by buying the freehold in Tradeco, and
granting a 999 year lease to Mr X or a company
owned by him (or vice versa). A downside would
be additional SDLT on the grant of the lease,
although this could be avoided if the vendor
A
Andrew Levene
Senior tax consultant,
BKL Tax
Email: andrew.
[email protected]
Tel: 020 8922 9394
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granted the lease to one of the parties and sold the
freehold subject to the lease to the other.
An alternative is personal ownership of the
property by Mr and Mrs X. A difficulty here might
be that they do not have their own cash to fund the
equity needed to buy the property. Taking money
out of the company would give rise to a significant
tax charge. However, there are benefits to this route:
! ER could be available on a sale of the property
for the part used by Tradeco, if the property
is previously used in the business and sold
as part of Mr and Mrs X’s withdrawal from
the business (under the rules for disposals
associated with relevant material disposal,
TCGA 1992 s 169K). The relief can be restricted
by s 169P to the extent that Mr and Mrs X
charge the company rent.
! Rollover relief could be available under the
extension for assets owned by an individual
and used in a trade of his personal company
(TCGA 1992 s 157).
Although full BPR would not be available, there
is still the possibility of 50% relief if, at the time
the property is transferred, it is used for Tradeco’s
business, and Tradeco is still controlled by Mr and
Mrs X (IHTA 1984 ss 104, 105(1)(d)).
Another possibility is acquisition by a new UK
company owned by Mr and Mrs X. The downside
of this route is that it provides neither ER nor BPR
for Newco shares. However, it has two important
merits:
! Firstly, the equity for the acquisition by Newco
could be funded with a loan from Tradeco
without tax cost arising. Although the loan
would be an investment asset in Tradeco, its size
is unlikely to jeopardise its trading status, and it
would be repaid over time.
! It also means that rental income would be
taxable at 20%. This would be attractive if the
client is keen to repay the bank loan as quickly
as possible, which would take longer if rents
were taxed at higher income tax rates.
A final dimension would be for the client to hold
part of the property in a small self-administered
pension scheme (SSAS). The benefit of this route
is that Mr and Mrs X could add to their pension
pot, and income and gains in the pension fund
would accumulate free of capital gains tax. The
downside is that access to the money would be
limited to what could be taken as a cash advance
or drawn as pension. The SSAS can lend back to
Tradeco, which is a further attraction. There are
also IHT benefits.
Assuming Tradeco is fully taxable for VAT
purposes, then regardless of whether the vendor
has opted to tax and charges VAT on the sale, no
irrecoverable VAT should arise. SDLT would be
due on the VAT inclusive price. If Mr X or a Newco
let the property to Tradeco, they would need to
consider whether to opt to tax.
It can be seen that there is no ‘one size fits all’
solution, and clients will need to consider which
ownership structure best meets their needs.
■
www.taxjournal.com ~ 19 September 2014

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