April 29, 2024
Full article
Investing in commercial property can be a daunting prospect, but at its heart, ‘commercial property investment’ means just two things: the purchase of a property, and the lease to a tenant.
Purchase costs: tax
In addition to the purchase price, an investor needs to anticipate the ‘hidden costs’ such as tax.
Land and Buildings Transaction Tax (LBTT)
The level of LBTT is fixed according to the purchase price and subject to certain reliefs (e.g. for charities, or transfers within a company group) cannot be varied. However, there are a few additional p oints to bear in mind:-
▪ Unlike its predecessor (Stamp Duty Land Tax) LBTT is a ‘slab tax’ like income tax where each slab of the price is taxed at its own rate – the tax calculation is not a straight percentage of the headline price
▪ For properties under £350,000 the rate of tax is marginally higher than on residential properties, but beyond that the level of tax on a commercial transaction is significantly lower.
Where a property is subject to VAT, the tax is charged on the VAT inclusive price.
VAT
VAT isn’t always payable on a commercial property. The basic rule is that all property is exempt from VAT – subject to certain provisos.
A landlord can elect to waive the VAT exemption on any individual property. This allows them to charge VAT on the rents paid by the tenants (which the Landlord can therefore offset against the VAT which the Landlord pays to HMRC) – charging VAT on rents can greatly reduce the Landlord’s quarterly VAT bill.
Once the VAT exemption has been waived, it affects all supplies at the property by the Landlord – meaning that VAT also becomes payable on the sale of the property to an incoming buyer.
However, charging rents on the property means that the building itself can be classified as a ‘letting business’ for VAT purposes. When that letting business (i.e. the property with the lease in place) is sold, it can qualify as a Transfer of a Going Concern and attracts 100% relief from VAT
To qualify for this relief, a buyer needs to be VAT registered and needs to waive their own VAT exemption for the property before the purchase completes
Landlord responsibilities
Buying a commercial property isn’t just buying bricks and mortar: it’s taking on the responsibilities of a commercial landlord under the lease.
Insurance
The Landlord’s principal obligation is usually to insure the Property. The lease will provide for a list of risks which are to be insured against (where cover is available), and a buyer should always check that their insurance cover marries up with the requirements of the lease.
The tenant will usually be required to reimburse the cost of the insurance and is to have their interest noted on the policy. Again, this is something a buyer needs to ensure happens in practice.
Repairs
If there is damage by any of the risks covered by the Landlord’s insurance, the Landlord uses the insurance proceeds to make good the damage (unless planning permission is refused for any rebuilding works). However, given that rebuilding works will take some time to complete, there are two important knock-ons for the lease:-
▪ The Tenant can’t use the premises once they’ve been damaged and so the lease will usually provide for rent to be suspended while the Landlord arranges the relevant works. It is important for the Landlord to arrange loss of rent insurance cover so that there is no loss of income from the property – any debt secured over the property will need to be repaid regardless of whether damage occurs.
▪ The Tenant won’t hang around indefinitely waiting for works to be carried out and may have the right to terminate the lease if they aren’t completed on time.
Apart from the insured risks, the Tenant will be responsible for maintaining the property in good condition – so if there is any work to be carried out to the property to bring it up to standard and the end of the lease, the Landlord may be able to charge the cost of those works to the tenant.
Service Charge
If there are any parts of the property not let to a tenant (e.g. roads and landscaping in industrial estates; structural walls, roof and foundations in a multi-let officebuilding), the Landlord will be responsible for maintain but, again, can re-charge to the tenant. However, if the lease provides for any caps or restrictions on the amount paid by the tenant, the Landlord will have to meet the shortfall out of its own pockets, so it pays to be aware of any gaps.
If any of the tenant’s obligations under the lease fall below the expected standard, it may give good reason for adjustment to the price paid by a buyer, so it’s always wise to engage professional advisers to assist you at the earliest opportunity.
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For More Information Contact:
Murray Stewart
Mobile: 07920 866 998
Direct Dial: 0131 516 5370
Email: mstewart@gilsongray.co.uk
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For More Information Contact:
Gregor Duthie
Mobile: 07841 022651
Direct Dial: 0141 433 7753
Email: gduthie@gilsongray.co.uk
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For More Information Contact:
Iain Witheyman
Direct Dial: 0131 516 5358
Email: iwitheyman@gilsongray.co.uk
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.
