Why renting your property to your company could increase CGT

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.