Structure for purchase of Industrial Unit

[simon field]

Greetings

Just mulling this over before we have a word with our accountant (who's a bit limp and we're considering a change but that's another story!)

So, we are in the process of buying the industrial unit from which we operate as a limited company (Company A). We've set up a LLP and are buying the unit with that entity, and intend to rent it back to our limited company (Company B).

Originally, we thought we were going to have to raise the deposit by way of dividends and thus be subject to the higher rate tax band.

My question is this - Is there any reason why company A can't pay a year's rent upfront? Or even three years? And then company B uses some of that to pay the deposit?

On the face of it, this would reduce company A's corporation tax liability, and as company B wouldn't be making a profit (due to the expenses of the mortgage payments) there would be no tax to pay there.

Am I missing something?

 

[KM-Tiger]

Am I missing something?

You might be. I think there are some HMRC rules around this to prevent a tax advantage from doing things outside of market norms.

As ever you do need to run this past an accountant.

 

[Energise Accounting]

You can only rent out something you own

 

[simon field]

You can only rent out something you own

Yes. Company B will own the unit.

 

[UK Contractor Accountant]

Yes. Company B will own the unit.

yes it will - but it cant charge advance rent before the property is legally transferred to it!

 

[KM-Tiger]

yes it will - but it cant charge advance rent before the property is legally transferred to it!

Surely all transactions could take place on the same day?

 

[simon field]

yes it will - but it cant charge advance rent before the property is legally transferred to it!

Do you mean that the mortgage has to be paid in full?

 

[simon field]

Surely all transactions could take place on the same day?

That’s what I thought…

 

[Energise Accounting]

Yes. Company B will own the unit.

Yes, company B will own it eventually, but OP wants to charge rent before company B owns it to pay the deposit, this can't be done for obvious reasons.

 

[simon field]

To clarify. Company B is buying the unit. Once we have completed, we’d like to rent it to company A.

 

[pentel]

Company B loans company A the deposit at a commercial rate of interest.

Once company A owns the building it then rents it to company B at an appropriate rent.

This could get very messy tax wise, especially re business asset disposal relief.

Might be worth talking to your accountant about creating a holding company which would own the shares of company B along with the building.

 

[UK Contractor Accountant]

not sure why you have LLP structure to own the property - the normal route would to create a group structure with company A (holding co) owning Company B. That way inter company loans can be made tax free as well as paying up dividends to holding co.

You can have an LLP as a holding company in a group structure but the various tax reliefs associated with group structures (apart from stamp duty) will not apply.

 

[simon field]

Yes, company B will own it eventually, but OP wants to charge rent before company B owns it to pay the deposit, this can't be done for obvious reasons.

Ah ok, that makes sense thanks.

 

[simon field]

not sure why you have LLP structure to own the property - the normal route would to create a group structure with company A (holding co) owning Company B. That way inter company loans can be made tax free as well as paying up dividends to holding co.

You can have an LLP as a holding company in a group structure but the various tax reliefs associated with group structures (apart from stamp duty) will not apply.

It was our accountant who advised us to do this.

 

[UK Contractor Accountant]

Also should have looked at Pension scheme buying the property - company pays lump sums into SSAS/SIP which is used for deposit.

 

[simon field]

Also should have looked at Pension scheme buying the property - company pays lump sums into SSAS/SIP which is used for deposit.

Will look into that, cheers!

 

[simon field]

Also should have looked at Pension scheme buying the property - company pays lump sums into SSAS/SIP which is used for deposit.

Me again.

Company A (our normal trading company); we don’t have the funds in the pension to raise the deposit.

Would this work: we both (partners) chuck £25k each into our pension and use that to pay the deposit (£50k)?

 

[simon field]

Edit: No drawing on pension until 55 years of age

 

[WaveJumper]

Have a read here:
https://www.onlinemoneyadvisor.co.uk/pensions/sipps/sipps-and-commercial-properties/

 

[lesvatadvice]

You haven't mentioned VAT. You should.

 

[simon field]

You haven't mentioned VAT. You should.

I am, now. Our trading company is VAT registered.

Our vendor is charging VAT so we will register the LLP (purchaser) in order to reclaim it.

or is there something else?

 

[lesvatadvice]

The company/LLP buying the property will need to opt to tax on the rent back to the trading company. Is the trading company fully taxable or exempt?
You should have a VAT specialist look in some detail on this, and help you fill in the additional forms with you, as it can easily go wrong!