The name on the title deeds affects your tax, your borrowing, your succession plans and how exposed the building is if the business runs into trouble. It is a decision to make before you find the property, and here is how to think about it.
For many owner-managed businesses, buying the premises they trade from is the biggest purchase the business will ever make. It is also the point at which the commercial property and corporate sides of the business meet, and in our experience the question of how the property should be owned is one that most buyers come to after they have found the building and agreed a price, by which time the options have narrowed and the lender is waiting.
The Budget on 28 October confirmed that from April 2027 income tax on rent received by individuals will rise to 24%, 44% and 49%, which widens the gap between holding property personally and holding it through a company. Lenders are looking much harder at who is borrowing and how the borrower is structured, as we explained last month in our article on refinancing commercial property. And since April this year the £2.5 million cap on business property relief has changed the inheritance tax picture for family businesses whose premises and trade sit together.
This article sets out the four ways we usually see business premises owned, what each means in legal terms, and the questions to work through with your accountant and your solicitor before you make an offer. We will leave the tax calculations to the accountants, who we work alongside on most purchases. Our interest is in what the structure means for risk, borrowing, succession and the day the property or the business is eventually sold.
The four usual routes
In your own name
The simplest option is to buy the property personally, or jointly with a spouse or partner, and let it to your company. The rent you receive is personal income, which is where the April 2027 increase bites, and when you eventually sell you pay capital gains tax at the personal rate, currently 24% for a higher rate taxpayer.
The attraction is that the building sits outside the company, so if the business fails the property does not automatically go with it. That protection is only partial if you have given the lender a personal guarantee, which most lenders will ask for. For inheritance tax, a property you own personally but which your trading company uses generally qualifies for business property relief at 50% rather than the 100% available on shares in the company itself, and both now sit within the £2.5 million cap.
Through your trading company
Buying through the company that runs the business puts the property on the same balance sheet as the trade. There is no rent to pay and no lease to manage, lenders are comfortable taking security over a trading business that owns its premises, and if the company is wholly or mainly trading the shares may qualify for business property relief at 100%, again within the cap.
The drawback is the mirror image of the first option. The building is exposed to everything that happens to the business, so if the trade fails, the property is there for the creditors. It can also complicate a sale. A buyer of the business may not want the property, or may not be able to afford both, and separating the two at the point of sale is expensive and can trigger tax charges that would have been avoided had the property been held elsewhere from the start. Taking the proceeds of a later property sale out of the company also means a second layer of tax before the money reaches you.
Through a separate property company
The third route is to set up a separate company, often a new special purpose vehicle created for the purchase, which buys the building and lets it to the trading company. This is the "PropCo and OpCo" structure that larger businesses use, and it is increasingly common among owner-managed businesses in Greater Manchester.
It ring-fences the property from the trade, it allows the business to be sold without the building or the building without the business, and it means the two companies can be owned by different people, which is useful where one child is coming into the business and another is not. Lenders are used to lending to special purpose companies, and the rent from the trading company gives them a clear income to lend against.
The price of that flexibility is more structure. There are two companies to run, two sets of accounts to file, and a lease between the two that has to be a real lease on proper terms. The property company is a property investment business rather than a trading one, which affects how business property relief applies to its shares, and that is a point to take advice on before you choose this route for succession reasons.
Through your pension
Commercial property can be bought by a self-invested personal pension or a small self-administered scheme and let back to your business. The rent the company pays is a deductible expense for the company and grows free of tax inside the pension, and the scheme can borrow a limited amount to help fund the purchase.
The rules are strict. The property must be commercial, the lease must be on market terms, the pension trustees become your landlord, and the business has to pay the rent in full and on time or there are tax consequences for the scheme. It is also worth knowing that from April 2027 unused pension funds will count as part of your estate for inheritance tax, which narrows one of the traditional advantages of holding property this way.
Our guide to the pension changes explains what that means in practice, and a financial adviser needs to be involved from the outset if you are considering this route.
Why the lease between you and your own company matters
Whichever route separates ownership of the property from the business that occupies it, there should be a written lease between the two, and it should be treated as seriously as a lease with a stranger. A handshake arrangement between a director and their own company is exactly the "tenant in occupation with no written agreement" problem we described in the refinancing article, and it surfaces at the worst possible moment.
The lender will insist on a lease because the rent is what it is lending against. HMRC expects the rent to be a market rent, particularly where a pension is the landlord. The lease decides who repairs and insures the building, which matters more than people expect when the roof goes. If the business is ever in difficulty, an administrator will read the lease to see what the landlord can and cannot do. And a lease of business premises usually carries the tenant's right to renew under the Landlord and Tenant Act 1954 unless the parties agree to exclude it, which is a decision to make deliberately rather than by default.
Our guide to negotiating commercial leases covers the terms that matter on both sides.
What the lender will want to know
Last month we set out what a lender asks a solicitor for on a refinance, and the same questions arise on a purchase, with the borrower's structure near the top of the list.
If a company is buying, the lender will want its articles of association, board minutes approving the borrowing, personal guarantees from the directors and usually a debenture over the company's assets alongside the mortgage over the property. Where a special purpose company is the buyer, the lender will look at how it is funded, whether the trading company is guaranteeing the loan, and whether the rent under the lease between the two covers the interest comfortably enough. Where you are buying personally, the lender looks at your own income and at the strength of the company paying you rent. Where a pension is buying, the scheme's borrowing limits set the ceiling.
The common thread is that the lender's questions are easier to answer if the structure was designed with borrowing in mind, and the legal work goes faster if your solicitor is involved while the lender is still deciding rather than after the offer letter arrives. Our property finance team acts for lenders as well as borrowers, which helps when it comes to knowing what will and will not be accepted.
What the structure means for your will
How the property is owned decides who can inherit it and how much inheritance tax is paid on the way. A property held personally passes under your will, and its 50% relief sits alongside the 100% relief on your shares. A property held inside the trading company passes with the shares, which may be exactly what you want or may hand a building to a child who has no interest in the business. A property company can be owned by a different mix of family members from the trading company, which is often the reason people choose it, but its shares will need separate thought on relief.
Whichever route you choose, the will, the shareholders' agreement and the lease all need to say the same thing about what happens on death or retirement, or after a falling out. Our article on whether your will actually covers your company walks through the gaps we most often see, and our note on why every business needs a shareholders' agreement explains why the company's own documents need to deal with the shares in a property company as well as the trading one.
The checks that do not change
A few things need doing whichever name ends up on the title, and they are easier if they start early.
- Title and access. Rights of way, restrictive covenants, unregistered strips and missing deeds all come up on commercial purchases, and the lender will want each one explained. Our guide to buying commercial property in the UK covers the process from start to finish.
- Planning and lawful use. The use you intend must be lawful, and any alterations by a previous owner need the consents that were required at the time.
- Energy performance. Commercial property generally cannot be let with an energy rating below E, and in June the Government confirmed that larger buildings of 1,000 square metres or more will need a rating of B by 2031. A poor rating affects what a lender will advance, what a future tenant will pay and what you may have to spend. Breaches of the minimum standard carry penalties of up to £150,000.
- If the seller has opted to tax the property, VAT is added to the price and stamp duty land tax is calculated on the VAT-inclusive figure. Whether the buyer should opt to tax, and whether the purchase of a tenanted building can be treated as a transfer of a going concern, is a conversation to have with your accountant before exchange rather than after.
- Existing tenants. If part of the building is let, the leases are part of what you are buying. Break clauses, rent reviews and the ban on upward-only rent reviews all affect the income a lender will count.
Questions to settle before you make an offer
- What happens to the building if the business fails, and does that match your appetite for risk?
- Do you expect to sell the business without the property one day, or the two together?
- Who should own the property in ten years' time: you, your children, or the business?
- How will the purchase be funded, and what will the lender want to see about the borrower?
- Will the business pay a market rent, and can it afford to?
- Has your accountant modelled the income tax, corporation tax, stamp duty land tax and capital gains tax under each route, including the April 2027 changes?
- Do your will and your shareholders' agreement say the same thing about the property as they do about the shares?
Speak to our commercial property team
The right structure is rarely the same for two businesses, and the wrong one is hard to change once the deeds are in a name. Moving a property between you and your company later on usually means paying stamp duty land tax again and can trigger a capital gains charge, which is why the time to decide is before the offer goes in.
Our commercial property team in Didsbury works alongside our corporate and commercial and property finance lawyers so that the purchase, the company structure and the funding are handled together, and we act for owner-managed businesses and investors across Manchester and the North West.
If you are thinking about buying your premises, or you already own them and are wondering whether they are held in the right way, please get in touch and we will be happy to talk it through.