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Commercial Property: How Taxes Can Affect Your Business

Following Brexit, the commercial market has demonstrated a mix of resilience and weakness. Rents for industrial property has seen a slight downward trend but continues to run at about 4% a year, which is quite robust. In contrast, retail property has suffered, with a tough retail environment pushing average rents down. Rents for office space initially plunged but has slowly ticked up since mid-2017.

With the industry in its current situation, the bottom line has never been more important for commercial property owners and one important area that must be taken into account within their budget is tax. With value added tax (VAT), stamp duty land tax, capital gains tax and tax on rental income all relevant to commercial properties, owners must be aware of these outgoings and budget accordingly.

Here’s a brief overview to help you understand how tax can affect your commercial property whether you’re a small business or an investor.

Buying a Commercial Property

When purchasing a commercial property, an important expense to take into account is the payment of Stamp Duty Land Tax (SDLT), which is still required for non-residential and commercial properties. Even if the transaction is under £150,000, you must still send a SDLT return.

In addition, there’s a number of ways in which UK property can be held, and you’ll need to consider which structure is the most suitable for your property investment as it can affect the tax you pay.

For example, you can decide to hold your property via a limited liability company, a traditional partnership, a limited liability partnership or unit trusts. The tax consequences will depend on a number of factors, which include your tax residence and domicile and the way in which you have decided to invest, so it’s always wise to seek tax advice based on your particular circumstances.

Renting Commercial Property

Income from let commercial property is subject to tax – this is for individuals, trustees and companies.

Individuals could be subject to income tax up to 45% on the net rental income and trustees are subject to income tax at 45%, regardless of whether or not they reside in the UK. The current law states that a UK resident company is subject to corporation tax on the net rental profits; this is currently at 19% but will reduce to 17% from 1 April 2020.

Deductions are usually available for revenue expenses, but commercial property owners should be aware that there is a restriction to the amount of interest and other finance costs that can be deducted in calculating a company’s profit. The detailed rules are complex, so any business that has an interest cost over the threshold of £2 million should seek expert asset management advice to understand the implications and any other considerations.

Other Tax Considerations

On top of this, we haven’t even covered the tax you may have to pay when you decide to sell or pass on your property. A commercial property owner must consider capital gains tax when they sell (or ‘dispose of’) an asset that has increased in value. Although not an immediate consideration, inheritance tax should also be taken into account if you plan to pass on a commercial property that is above the £325,000 threshold in your will.

In conclusion, it’s vital to consider your tax payments and account for them within your budget when purchasing, renting or disposing of a commercial property. All in all, it’s incredibly complex and we advise seeking professional advice from experts to understand how best to manage the tax for your commercial assets.