How renting your property to your company could increase your CGT bill

Holding your property personally and renting it to your company used to be a common and pretty effective way of reducing capital gains tax on a future disposal.

Under the pre April 2008 rules the disposal would qualify for business asset taper relief so that the effective rate of CGT on the disposal was reduced to 10%. This applied whether the property was rented to the company for a full market rent or rent free.

With the removal of taper relief and it's replacement with Entrepreneurs Relief, this is no longer the case. Although there are provisions to allow you to own a property personally and still benefit from Entrepreneurs Relief on a future disposal this is much more restricted than under the old taper relief provisions.

Points to Watch Out For

Qualifying Company

Unlike the old taper relief rules, the definition of a qualifying company is stricter for Entrepreneurs Relief. In particular you need to own more than 5% of the shares and also be an officer or employee of the company.

If a property (or other asset) is used by a company that is not your personal company it won't qualify for Entrepreneurs Relief.

Note though that assets can also qualify for the 'associated disposal' rule if they're used by a partnership in which you are a partner.

Payment of Rent

Again, unlike taper relief, the assets would need to be used by the company without the payment of rent to qualify for full relief. This will be a blow for many business owners. Under the taper relief rules you could rent out property to any unquoted trading company and qualify for business asset status. The fact that rent was or wasn't charged was irrelevant.

When calculating Entrepreneurs Relief on any 'associated disposals' such as property used by your personal company, if you have charged rent, part or even none of the gain may qualify for relief.

The legislation provides for a reduction in the gain that qualifies for the relief. This is to be calculated on a 'just and reasonable' basis taking account of the extent to which the rent paid is less than the full market rent.

So if a full market rental was paid there would be no Entrepreneurs Relief, whereas a rent at 50% of market value would equate to 50% Entrepreneurs Relief.

The Revenue's thinking here is that if the property was available only on the payment of rent it is effectively held as an investment and not for the purposes of the business.

Example

Peter owned a property that was rented to his personal trading company for the use in its trade. He's about to sell his company and has been offered £300,000 for the property. He originally acquired the property in May 2008 and is looking at a disposal in December 2009. If he originally acquired the property for £50,000, he would be looking at a capital gain of £250,000.

He'd then need to assess the amount of Entrepreneurs Relief. Assuming the £1 million limit will not be breached, he would need to compare the market rental with the rent actually charged to his company.

If, for example, he charged the company 50% of the market rent in the period May 2008 -- December 2009 the gain that would qualify for Entrepreneurs Relief would be £125,000, and Entrepreneurs Relief on the property disposal would be £55,555.

As such he'd have a gain on the property of £194,445. After the annual exemption of £10,100 his CGT charge would be £33,182.

If he had charged the company a full market rent no Entrepreneurs Relief would be due on the property disposal and his CGT charge would be £45,000.

However, its important to note that the adjustment for any rent charged will only apply where rent is paid after 5th April 2008 and is less than the full market rent.

So if there was rent paid both before and after April 2008 you would need to apportion the gain that qualifies for Entrepreneurs Relief into (1) the pre April 2008 gain and (2) the post April 2008 gain.

The Pre 2008 gain would qualify for Entrepreneurs Relief irrespective of any rent paid, but the Entrepreneurs Relief on the Post 2008 gain would be based on the amount of rent charged.

Example

On 5th April 2010 Jack sells the shares in his wholly owned trading company. He realises a capital gain on the shares of £500,000 which qualifies for Entrepreneurs Relief of £222,222.

He also personally owned the premises from which the company has traded. He agrees to sell this to the purchaser and realises a capital gain of £400,000.

He originally purchased the property on 5th April 2000 and since that date he's always charged the company a full market rent for the use of the property.

To calculate the amount of Entrepreneurs Relief on the property Jack should look to split the gain into the pre and post April 2008 gain.

In this case the pre 2008 gain would equate to 8/10th (ie the period April 2000 to April 2008) and the post 2008 gain would be the other 2/10ths.

Entrepreneurs Relief would be due in full on the pre 2008 gain but the payment of a full market rent on the post 2008 gain would eliminate Entrepreneurs Relief on this element of the gain.

You'd therefore have Entrepreneurs Relief of:

Pre 2008 Gain:
£400,000 * 8/10 * 4/9 = £142,222
Post 2008 Gain:
£400,000 * 2/10 * 0% = 0

The total Entrepreneurs Relief in this case would therefore be £142,222.

Therefore if you do own a property personally which is used for the purposes of a trade carried out by your unquoted trading company this would be restricted to the extent that a full market rent was payable after April 2008. If you had been renting the property to the company before April 2008 you'd be looking at a substantially higher amount of Entrepreneurs Relief.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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