Property Ownership: Tax Advice from Hazlewoods
If you own the property that is used in your healthcare business, it may be time to consider whether this structure is ideal from a tax perspective.
The diagram below is a common structure of a care business – A and B (often husband and wife, although it doesn’t have to be) own the property or properties from which the business trades, and rent it/them to the trading company, which is also owned by A and B. This structure often arose upon incorporation from a traditional partnership with a view to avoiding a Stamp Duty Land Tax (SDLT) charge. After all, why pay SDLT again, when you paid it on the original purchase of the property or properties?
We have met many operators who are in the above or similar position and although not widely realised, there are a number of potential tax disadvantages of this structure:-
1) Inheritance tax (IHT). Upon death, it is likely that 50% of the property value would fall into the owner’s estate i.e. be subject to tax, whereas if the property was owned by the company, the entire value of the shares could qualify for Business
Property Relief (BPR) and therefore not be subject to IHT.
2) Capital gains tax (CGT). Upon sale of the company, and assuming all conditions are met, the shares may be eligible for Entrepreneurs Relief, resulting in a tax liability of 10% on the disposal. If the property is owned privately, the tax liability is likely to be a mix of 10% and 20%. Overall, it is likely to be higher though.
3) Income tax (IT). In many cases operators will need to charge rent to the trading company to cover their personal bank loan repayments in relation to the property, incurring significant personal tax liabilities. This often means that the monies they take out of the company (e.g. dividends or salaries) are taxed at the higher rate or additional rates of personal tax.
An alternative is to consider transferring the property into the trading company. Each case would need to be carefully analysed. Considerations include:-
1) SDLT. If the property is owned as a partnership it may be possible to transfer it
into the trading company, with no SDLT liability.
2) CGT. Upon ultimate disposal of the business, it is likely that the CGT position will
be improved by a transfer of the property into the trading company. There may or may not be CGT to pay upon transfer of the property into the limited company,
depending on a number of factors – this area would need to be looked at in detail to get the right solution for you.
3) IHT. It is possible that by transferring the business property into the company the IHT position, upon the owner’s death, may be improved. The maximum saving being, to avoid 100% of the property value falling into the owner’s estate.
4) Income tax. Provided that the associated bank debt is also transferred into the company, there may no longer be any requirement to charge rent, which could improve the personal tax position.
As with any tax planning, a transfer of property from private ownership to company ownership will not be suitable for all.
It may be that the current banking arrangement is favourable (and you don’t want to give your lender an opportunity to vary the terms!), or that there is a minority shareholder and by transferring additional value into the company (the property) you would be increasing the value of their shareholding.
If you would like to discuss the above please contact Andrew Brookes or Rachael Anstee, we believe that for many with this structure we could suggest a better structure.