Office politics and the revenue

JA writes: I have decided to transfer my business into a company as I understand this will save me tax on the business profits. I also own the business office on which I have quite large mortgage borrowings. At present the interest on the mortgage is treated as tax deductible against the business profits, but would this be the case if the property were transferred into the company? At the moment there is only a small element of gain in the property, but I would rather pay a small amount of tax now if it benefits me in the long run. Can you advise what would be the best way to hold the property?

Answer

You need to consider both the short and long-term tax positions to find out what is the best solution for you, writes Jon Sutcliffe, a partner at Kingston Smith. In the long term, would you expect to hold the property after you have sold the trade? If not, then transferring the property at this point may only create additional costs now, and tax liabilities and complications for the future. Generally, there is more flexibility to be gained from keeping the property owned personally. Either way, for capital-gains purposes, the property should qualify for full business-asset taper relief for the period it is used in the trade. Holding the property personally would avoid creating a stamp-duty liability on the transfer to the company. This could be 3% of the value of the property — a fairly large amount. You would also save on the time spent remortgaging the property in the company name, and the associated conveyancing costs. At present your mortgage interest is charged against your business profits. If the property were transferred to the company, any interest on a company mortgage would be deductible from the company’s profits. Alternatively, if the property were personally held, the mortgage interest would be deductible from rent received from the company. Rent should be paid at no more than market rates. Your plans for the business will affect how the transfer is done for tax purposes. It is vital that you take professional advice before making any transfers to mitigate your tax liabilities, to avoid compromising your flexibility for the future.