Buying a Bed and Breakfast establishment tax efficiently
Question:
I am thinking of buying a Bed & Breakfast business. The property will be owned by me and my wife personally as individuals but the business will be run as a partnership with my wife. However I thought that the business could be run as a limited company, with the property kept out of the business and owned as detailed above, and all corporate profits after tax at 21% could be left in the business to accumulate, both my wife and I have income from other sources so would not need to take a salary / dividends from the business.
This would allow cash to accumulate in the company and be withdrawn in a winding up at a later date. The capital distribution being taxed at 18% but avoiding my self and wife being taxed at 40% on any profit as we would be if running the business as a partnership. Is their any problem with operating this way?
Answer:
Yes, there's no problem with splitting the ownership of the property and the business. As you state you could hold the property personally and conduct the trade via the company. The profits of the trade would be taxed in the company at 21% and you could wind the company up in the future and extract as a capital distribution paying CGT at 18%.
One issue that should be borne in mind is the CGT position on a future disposal of the property.
If you conducted the B&B trade personally and owned the property personally on a future disposal of the B&B property & business you could qualify for Entrepreneurs Relief to reduce the effective rate of CGT to 10% (on gains up to £2M per person).
However, if you held the property personally you would only qualify if the property was an associated disposal. It would qualify as an associated disposal if:
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.
Therefore the the property would need to be used by the company without the payment of rent to qualify for full relief on a future disposal.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).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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