In his last article for ATF Professional, Martin Cook, Director at Exel Finance, discussed how much you can borrow to buy your own premises and how much it will cost. In this article, Martin will cover how to set up the purchase of your commercial property, outline your options, and discuss the advantages and disadvantages of each.
Why is this important? How you choose to purchase and own your premises needs to be aligned with your overall objectives and any tax implications and other considerations need to be taken into account; this will be discussed briefly in this article. Getting it right at the outset is important as a change later on can be very costly. See the example further on.
What are your options? Well, the obvious one is to purchase your commercial property in the name of your own trading company. One advantage to this is that you would be classed as an owner-occupier, and as such, some lenders look upon this arrangement favourably, you can secure competitive rates. Another advantage is that having your trading company own the property will improve your balance sheet and would enhance the value of your company in any negotiations for the eventual sale of your business.
The main disadvantage to this arrangement is that your commercial property is not protected in the event of insolvency or bankruptcy. Or if for any reason your business failed or was the subject of a legal claim.
So what are the alternatives? You could own the property either in your own name, as a sole trader, or you could purchase the property using a Special Purpose Vehicle (SPV).
What is an SPV
An SPV is nothing more than a limited company, and as it is a separate legal entity, it would be protected from any claims against your trading company.
I know from experience the pain, stress and anguish associated with the failure of a trading company, and so to have the assurance that your commercial property is protected and still remains a valuable investment asset in your ownership is very comforting.
How to set up an SPV
The usual way to set up an SPV is to form and register a limited company, just as for any other company, but in such a way that it is clearly a special purpose vehicle. You can do this yourself and register it with Companies House, but be sure to set it up correctly and with the right SIC code. If in doubt, have your solicitor or accountant do this for you. You and your spouse/partner can be Directors and Shareholders of the SPV and draw salary and dividends as you would from your trading company.
If you choose to own your commercial property as a sole trader, then bear in mind that tax relief on mortgage interest payments is only available at the basic rate. So if you are a higher or additional rate taxpayer, the tax liability and, therefore, operating costs are higher.
However, limited companies are still able to claim full tax relief on the interest they pay, which increases the potential profit available. It is important to note that an SPV can only offer these possible tax advantages under current legislation, which is subject to change, as with all legislation.
There is more paperwork required to operate an SPV. You will have to file accounts with Companies House and submit a tax return to HMRC. These filing requirements are much more cumbersome than completing a personal tax return. Therefore there will be extra costs in professional fees payable to your accountant.
Lenders are comfortable lending to an SPV even though it might be brand new and set up exclusively for purchasing your commercial premises. However, most lenders will charge a slightly higher interest rate to limited companies.
Whether you choose to own the property through your trading company or personally or use an SPV, funding is available from lenders, following the same principles outlined in the last article.
Choosing which vehicle to use to own your commercial property is very important. Here is an example to illustrate the point. Let’s assume that you decided to purchase your property in your own name both to keep things simple and protect the asset from potential claims through your company. All good so far. Now, let’s imagine ten or fifteen years further on, your tax position becomes such that your accountant suggests that it would now be more tax efficient to own property through a limited company. You could set up an SPV for that purpose, but now let’s consider the cost. Firstly you will have to sell the property to your new SPV, and if you have made a taxable gain, you will have to pay capital gains tax at the prevailing rate.
Then your SPV will have to purchase the property from you and pay stamp duty, which you had already paid when you purchased the property initially. Plus, all the professional and associated lender fees. A simple change of ownership can be very costly.
Deciding how to set up your commercial property purchase requires careful consideration and professional advice. This will ensure that you can make an informed decision consistent with your unique personal circumstances and overall objectives. Hopefully, this article has given you food for thought and a list of topics to discuss with your accountant or other professional adviser.
In the next article, I will discuss one other tax-advantageous vehicle for holding and owning your commercial property.
For further advice or information, please contact Martin at email@example.com or call him on 0161 327 1837.
Martin’s previous articles