Selling business property previously rented
July 08
Many business owners have bought commercial property that has been fully or partly occupied at various times by their trading concerns, and rent may have been charged for the use of the property; either the property owner has been paid rent by his business, or by other third parties.
This article discusses the way in which the new capital gains tax rules apply to the disposal of these properties on or after 6 April 2008.
As you may remember, all taxable capital gains are now subject to a flat 18% tax charge. There is one notable exception. If a disposal qualifies as the sale of a business asset you may be able to claim entrepreneurs' relief. If you can claim, the first £1m of qualifying lifetime disposals are subject to tax at the reduced rate of 10%. Generally speaking the disposal of a business property should qualify for entrepreneurs' relief as long as it is sold in conjunction with the sale or cessation of the business, or within 3 years of that date.
Obviously, if you have purchased a property for the purposes of running your business you may feel that this relief will be available to you when you sell the property. Unfortunately the position of certain property owners, particularly those who have charged rent to their business, may not be so straightforward.
The issues that affect the availability of entrepreneurs' relief when commercial property has been rented to a business, are complex and certainly beyond the scope of this article to fully explore. However, we have highlighted below the fundamental difference between a disposal by a sole trader and a disposal by a partner or company shareholder.
1. Sole traders are treated differently to partners and owners of limited companies. If you are a sole trader there would be no commercial or tax purpose in charging your business rent for the use of your property - both property and business are in your name. There could be circumstances where part of the property has been let to a third party. However as long as part of the property is in use by the owner's business when the property is sold, a claim to entrepreneurs' relief should be effective; at least to some extent.
2. Partnerships and limited companies. If a partner or shareholder has purchased a property and made this available to the business for a rental payment, the CGT position on disposal is more complex. If rent has been charged by the owner to the partnership or company, a claim for entrepreneurs' relief on sale may be precluded.
A final point. Relevant legislation has not yet completed its passage through Parliament. The Treasury are aware that a sale of a business property prior to 6 April 2008, that would have qualified for taper relief, may not now qualify for entrepreneurs' relief; purely due to the rental payments issue. There is therefore a possibility that there may be some relaxation of the rules in any amended legislation.
If you are contemplating a sale of this type of property please contact us before completing the sale in order that we can help you organise contracts in the most tax efficient way.
