Where a company owner or director personally own a property that their business operates from, is it tax-efficient to charge rent? When considering the tax consequences there are several areas to consider Capital Gains Tax, Entrepreneur’s relief and Corporation tax.
Charging rent to your company will create an added expense and in turn reduce the CT chargeable on your company. The downside to this is that when it comes to selling the property, as an associated disposal, it will reduce the entitlement to ER, if not all of it.
Although dividends are generally the most tax-efficient way to extract income from your company, depending on the rate of income tax you pay, rent can be more efficient.
Example
Matt, who is a higher rate taxpayer, owns the shop from which his company, Footlink Ltd, trades.
It pays rent of £3,000 per month (the market rate). After tax relief the annual cost of the rent to Footlink Ltd is £29,160 (£36,000 – 19% CT relief).
After tax Matt receives £21,600 (£36,000 – 40%).
When comparing this if the payment was made as a dividend of £36,000: net cost to company £36,000 net income for Matt £24,300.
Footlink Ltd has an extra £6,840 in the bank while Matt has £2,700 less in his.
Overall there’s a net saving of £4,140 (£6,840 – £2,700) between Footlink Ltd and Matt. Of course, for Matt to extract the extra money from the company he will have to pay tax, which could be anywhere between 0% and 45%, but whatever the rate is he will be better off as a result of taking rent instead of a dividend.
Comparison
Having calculated the Income tax and the CT complications we also need to consider the CGT consequences of both treatments.
When charging your company rent on a property you own personally, ER is either not available where full market value rent is charged or, restricted when rented at under value.
Example
Late in 2019 Matt decides to sell Footlink Ltd to a third party. The capital gain arising from his property will work out at £150,000 and he has utilised his annual exemption.
If Matt has charged MV rent to the company his tax chargeable will be £150,000 @ 20%, resulting in CGT payable of £30,000. Now if the property was used rent free ER would be available and his CGT payable would instead be £15,000 (£150,000 @ 10%).
Conclusion
If you take the savings in an isolated year, then charging rent would result in a Matt being better off by £4,140 for income purposes, however on the sale of the company he is £15,000 worse off.
It must be noted however that the saving of £4,140 is a saving per year and the £15,000 is a one-off saving in favour of not charging rent. It would therefore be wise to consider the long-term business plan and whether there is an intention to sell the property or keep it for rent.
