Insight

Top tax tips for commercial property landlords

Insight

Here are Cowgills top five tax tips for commercial property landlords operating as individual owners or in partnerships.

  1. 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 make sure you consult your tax and legal advisors prior to drafting any agreements or agreeing heads of terms.

  1. 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.

  1. VAT – the option to tax 

If you are undertaking refurbishment expenditure then 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.

  1. 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.

  1. Entrepreneurs’ Relief

If you own a commercial building that is occupied by a trading company in which you are a director or employee and own at least 5% of the shares then there is an opportunity to access a 10% capital gains tax rate on a sale of the building if it is associated with a sale of your shares in the company.

This 10% rate can only be accessed in full if no rent is charged to the company so if an exit from the company and a sale of the building is envisaged it may be worth considering reducing or giving a rent holiday to the limited company.

For more tax advice contact james.greenhalgh@cowgills.co.uk

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