Garden office / workshop for Ltd company

I have a very small garden behind my (owned) house. My Ltd company currently pays rent in an office building for a small suite (180sqft). About £300 pcm bills etc inc in a City centre location. Thinking of building something (insulated log cabin) in the back garden to take its place. Two ideas:

1) Personally build it, and rent it to LtdCo. I guess the rent becomes taxable income to me personally, and remains a tax deductible expense for the business. In order to have the money to build it I'll have to have paid tax on it (business as profits and personally as dividends), and can't get VAT back on materials.
2) Rent the land with utilities supplied to LtdCo. Avoid any eventual CGT by making the LtdCo remove the structure at end of tenancy (does that work?). Can get VAT reclaimed on whole build. Don't pay dividend tax on the money needed to build it. Can claim capital deductions for additions to the basic structure, such as electrical installations, furniture, insulation, etc. Building is owned by business, for its exclusive use, no BIK.

Yet most often I see advice against 2) - so I'm probably missing something?

I guess one thing my current arrangements does have in spades is legitimacy - it's pretty clearly all above board and straightforward, whereas 2) could start to raise questions.

What are the other drawbacks to 2) I'm missing?

 

There isn't any CGT on a shed - they go down in value!

One of my clients imports these cabins and erects them on site for customers. Never been busier with london based companies installing cabins in employee gardens and arranging home working.

 

Or in a gale

 

The CGT stuff I read sounded scary - that the charge could be relative to the sale price and the % of land that the commercial property was on. In my case, city centre 3 story house with a small courtyard garden; the overall % of land covered by the shed would be comparatively high with respect to the value of the overall property.

Also, what strategies can be put in place to ensure there is no BIK issue?

There are quite a few posts that are very pessimistic over doing exactly this, with people paying for their sheds out of their own pocket which seems nuts to me.

I'm not doing this as a tax scam, it is genuinely something solely for the benefit of the business, so I'll be damned if I'm going to be personally taxed on something like that if I can avoid it without incurring undue risk.

 

Thankfully the house is 3 stories and the walls on all sides are over 15ft - there is basically no wind in the yard short of an overhead twister (thanfully not that common in Norwich city centre!)

 

I am fairly confident you are not running a massive risk of CGT in this instance.

If you rent the shed, or the land and the shed, to a Ltd company you will have to declare that rent as income to yourself, as you correctly suggest. Of course, it will be a tax deductable cost to the Ltd company.

You need to do a few sums to work out how it benefits you the most, as there are a couple of 'it depends' scenarios that might change the advice.

 

The obvious answer is to ask your accountant, who is familiar with your personal financial situation as your personal tax rate, pension contribution, etc could be impacted.

But consider:
1a) Borrow cost of build (perhaps from your LtdCo), then...

...then use the personal rental income to repay the loan.

Of course, the loan repayments to the LtdCo could be paid into your pension, turning a lump sum in the LtdCo into a stream of pension contributions plus a personal asset for you, but check with your accountant.

 

As somebody who has been through all of this...

You can’t avoid the BIK issue. Any building constructed at the directors home is taxable as a BIK regardless of whether it’s exclusively used for business. The “asset used for business with no significant personal use” rule does not apply to buildings. Leasing part of your land won’t avoid this either.

The building cost is also not tax deductible as a capital asset so no real saving there (ok you’re still paying for it out of company funds instead of post tax personal income so maybe a small saving).

You’d be able to reclaim the VAT if you’re registered and that’s the only real saving but this could be wiped out by the BIK and potential CGT issues.

CGT can be an issue when you sell your home if part of your land is used to permanently site a company owned building although in practice this depends on the size of your property, the size of the outbuilding and the value of your home.

If the building is owned by YourCo then this IMO increases the risk of it being liable to business rates. You need to check with your local valuation office.

The only reasonable way to do this is pay for the building yourself thus avoiding the BIK and CGT issues, have YourCo pay for any equipment and furniture and any other costs relating to its use for the business and then you can either claim £6/week for use of home or potentially rent the building to YourCo for business hours only but you will need to report this rental income. You could also pay for a dedicated broadband connection on a business contract.

Finally don’t forget to check planning permission isn’t needed. Permitted development rights aren’t always applicable and can depend on how the building is used. If used to run a business some councils will insist the outbuilding’s use is not “incidental to the enjoyment of the main dwelling house”. Others will be fine if it’s clerical use only and no visitors. Might be worth getting a certificate of lawful development.