Rent up frustration – Our latest Q + A for Your Move Magazine is about the impact of rent on Entrepreneurs Relief


Q:
 I am an estate agent, and my business operates as a limited company. I own the premises which the business uses personally and I charge rent (plus VAT) to my limited company. My accountant has told me that, unless I stop charging rent when I sell the premises, I will not be able to claim Entrepreneurs Relief to reduce the Capital Gains tax on the sale. What should I do?

A: Entrepreneur’s Relief  (ER)  can reduce the tax rate on qualifying gains to 10% up to a lifetime limit of £10 million (Compared to a  tax rate of 18/28% normally). Assuming that your limited company meets the necessary ER conditions then if you were to sell the building/premises at more or less the same time as the business then you could qualify for Entrepreneurs Relief on both disposals, which can save substantial amounts of tax.

However, and this is what your accountant is taking about, the amount of Entrepreneur’s Relief is restricted if.

• The building has not been in use in your business throughout its period of ownership.

• The building is only partly used in the business.

• Rent has been charged.

If rent has been charged then the tax relief will be restricted by reference to the proportion of the market rent which was charged. This catches many people in your situation out as the previous taper relief rules did not include this restriction.  Your accountant should be able to do some calculations to show the impact of the rental payments to date and going forwards on your position.

Q: OK, well I am planning to sell my business and the building in a few years and retire, so I will stop charging rent straight away!  Is there anything else to think about?

A: Yes, isn’t there always! Stopping charging rent can sometimes lead to a major VAT headache. If the building has ‘Opted to Tax’ which means that VAT was not suffered when it was purchased and VAT is charged on the rent, then ceasing the rent means that you may not be making taxable supplies, and you will be obliged to deregister for VAT. This will unfortunately give rise to a VAT liability of 20% of the Market Value of the building. I have heard of several examples where the tax man has caught up with unwitting taxpayers in exactly your position, so good advice is vital.  Contact us if you would like further advice or assistance