James Greenhalgh, Tax Director in our Property and Construction team gives his top five tax tips for commercial property landlords operating as individual owners or in partnerships.
Tenant Incentives
When negotiating contributions to tenant fit-out costs or improvement expenditure there is an opportunity for landlords to ‘lock in’ tax relief against rental income by stipulating that the contribution is allocated against qualifying fixtures such as mechanical and electrical (M&E) installations.
This type of tax planning requires careful drafting with regards to the legal documentation so we would always recommend consulting your tax and legal advisors prior to drafting any agreements or agreeing heads of terms.
Mortgage Interest Relief
As a commercial property landlord with additional residential properties within your rental portfolio you should consider where your mortgage debt burden sits. If there is equity in the commercial property you could consider re-mortgaging the commercial property in order to pay down debt on the residential properties. Full mortgage interest tax relief is available for commercial properties but it’s restricted for residential properties.
VAT – the option to tax
If you are undertaking refurbishment expenditure consider the VAT treatment. If a commercial property is not ‘opted’ for VAT purposes then it may be worth considering making the option enabling you to reclaim full VAT on the refurbishment costs. There might be a knock on effect of being required to charge VAT on rents to tenants who are not VAT registered though.
Annual Investment Allowance (AIA)
When undertaking refurbishment projects or new build of commercial property investments consult your tax adviser early on in the project because collating cost breakdowns in ‘real time’ during the construction phase will almost always result in higher levels of claims available to offset costs of qualifying fixtures (M&E, Heating, Lifts, etc.) against rental income.
Acquisitions or construction undertaken in 2020 may also be eligible for offset against rental income received for other properties in your portfolio up to a limit of £1M.
Entrepreneurs’ Relief
If a commercial property is let to the landlord’s trading company then you could consider not charging rent to the trading company if a sale of the trading company and property is contemplated in the future.
This is due to the fact the 10% Entrepreneur’s Relief capital gains tax rate available for sales of commercial property ‘associated’ with the sale of a trading company is restricted where rent has previously been charged.
Disclaimer
The information was correct at time of publishing but may now be out of date.
