Is it time to charge rent for your property?

30th July 2020

In March 2020, the lifetime limit for Entrepreneurs’ Relief was reduced from £10 million to £1 million, thereby reducing the potential value of the relief from £1 million to £100,000. This was an unwelcome blow to many business owners but it does bring with it an opportunity.

The relief was also subsequently renamed “Business Asset Disposal Relief” although I have seen little sign that the new name is catching on so will refer to “ER” in this blog.

To remind you, ER allows for an individual to benefit from a reduced rate of capital gains tax of 10% on the disposal of qualifying business assets, compared to the standard rate of 20%. Qualifying business assets can include assets owned by an individual which are used in their trading business or company, such as property.

To rent or not to rent?

It is often the case that an individual will own a commercial property which is used by a company that they own to carry on its trade. For example Mr Shakespeare may own a shop, with Will’s Books Limited trading from the premises as a bookshop.

Previously, Mr Shakespeare would weigh up ER against capital allowances when deciding whether to charge rent to Will’s Books Limited.

If he charges market rate rent to the company then ER is not available on a future sale of the property. This is because the property is then classed as an investment rather than an asset of the business.

However, if he charges less than market rate rent, then there may be a restriction on the amount of capital allowances that can be claimed. Capital allowances allow companies and businesses to offset the cost of qualifying plant and machinery against their profits. For a property business to be able to claim capital allowances, it must be “an ordinary property business”, whereby it leases premises to a tenant.

So Mr Shakespeare must choose whether to:

  • Charge rent and claim capital allowances; or
  • Not charge rent and benefit from ER on a future disposal.

Often, an individual would choose not to charge rent to his own company in order to preserve the entitlement to ER, as this relief would usually have been more valuable than the ability to claim capital allowances.

Fortunes change

But ER just became a whole lot less valuable for many people, prompting the question of whether it may now be a good idea to introduce a rental charge in order to qualify for capital allowances.

Usually, working out which relief is more beneficial would require the ability to see into the future or, as Mr Shakespeare says, to “look into the seeds of time and see which grain will grow”, to know what the gain will be when the assets are sold. By the time this is known, it would usually be too late to introduce a rent.

However, this decision has been made easier with the restriction of the ER lifetime limit to £1 million, as it is much less likely that there will be any lifetime allowance left for the property disposal.

All’s well that ends well

The Chancellor has brought capital allowances back into play. It is time for owners of commercial properties to reconsider their rental strategy. Not only might this allow them to claim capital allowances, but charging rent can also be a tax efficient way to draw funds from a company.

How can we help?

Please let us know if you would like us to help you review your rental strategy.

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