Buying commercial property is big decision and one that should be made with full awareness of all the factors involved. Of these, it could be argued that tax considerations can have the most varied impact. This is because tax as it relates to business operations is one of the most complex and ever-changing areas of property law. Here, you’ll find all the tax considerations that you need to be aware of when buying commercial property.
Tax that applies to a commercial property purchase
Commercial property purchases tend to involve larger amounts of money than residential ones, which attracts certain types of tax. These types of properties are also treated differently for the purposes of tax due their intended uses. This can be both advantageous and detrimental, so it’s worth consulting with an expert in commercial property conveyancing.
Value added tax (VAT)
Although VAT is not applied to all commercial property purchases across the board, it can be included for certain buildings. Namely, the purchase of any commercial building that’s considered new (less than three years old) are liable for VAT. There are then a number of exceptions to VAT, which apply based on the nature of the property lease and if the property is student accommodation. Owners of commercial property have the option of charging VAT at the standard rate (20%). This would impact all supplies associated with the property, such as rental income. As you can see, how VAT affects the purchase of commercial property is very circumstantial.
Stamp duty land tax (SDLT)
Both commercial and residential property purchases are subject to stamp duty land tax. This must be paid within two weeks of the purchase, with the amount varying depending on the total value of the property.
- Up to £150,000 – zero percent VAT.
- Between £150,001 and £250,000 – 2% VAT.
- Anything above £250,000 – 5% VAT.
Possible tax benefits from buying commercial property
While there are tax costs associated with the commercial property transaction itself, buying commercial properties can be leveraged for tax benefits in the future. These potential benefits can vary depending on the buyer’s position.
Personal holding
If you generate income from a property that you have personal ownership of, this income will be taxed. This will follow the regular rules for income tax, with rates varying from 20-45%. However, in these cases you might be eligible for special capital gains treatment when you come to sell the property. This has the potential to give you access to a portion of profits tax-free. The benefit will vary depending on how the property is used and the type of relief you qualify for.
Holding through a limited company
While companies still have to pay Corporation Tax on profits generated by commercial property, this rate is often far less than that for a personal investor. Additionally, corporation tax relief is available for pension contributions that come from limited companies.
Capital Gains Tax
Any increases in the value of the property will incur CGT when you come to sell the property (asset disposal). This tax is lower for commercial properties than residential, plus you will only pay tax on gains that exceed the annual tax-free allowance. At the time of writing, this is set at £12,300.
Capital Allowances
The owners of commercial property can access capital allowance relief for plant and machinery purchases. It’s possible for the price of a commercial property to be decided in consideration of these assets. Buyers then have the option of setting this part of the cost against future profits. As a result, conveyancers should create a detailed breakdown of how commercial properties are valued. Capital allowances have been made more attractive in recent years thanks to the Full Expensing allowance, which allows companies to claim back 100% on qualifying new investments in their first year. This lasts until March 2026.
Looking for conveyancing solicitors in Cramlington?
The team at Toomey Legal contains multiple tax specialists to help you make the right business decision when buying commercial property. We can then support you throughout the conveyancing process with bespoke services from our conveyancing experts. Get in touch today to discuss your business property goals.