UK Fact-File Part 7:
Individual Business Owner Welfare and Lifestyle

7.8 UK Domestic Real Estate

Domestic real estate and its tax treatment

A wide range of business accommodation is available in the UK in the form of offices, shops or manufacturing units. There are many industrial parks where incentives in the form of reduced rent and rates (property taxes) are offered to businesses to rent units to run their business. Business rates can be a hefty outlay so it is worth exploring what incentives are on offer in a particular location.

Although owning a property from where a business will be run sounds attractive, it should be borne in mind that when the asset is sold or transferred, a liability for Capital Gains Tax (CGT) arises. This includes land and fixtures and fittings, if owned by the business owner. CGT has traditionally been a flat rate 18% for individuals, but in Chancellor George Osborne's 'emergency' budget, delivered in June 2010, it was announced that, effective immediately, taxpayers paying the basic rate of income tax would continue to pay capital gains tax at the 18% rate, while higher rate taxpayers would pay at an increased rate of 28%.

An Annual Exemption of GBP10,100 is allowed before calculating liability. Non-UK residents do not qualify for the exemption. Companies pay tax on capital gains at the relevant Corporation Tax rate.

A further consideration when purchasing a property is that Stamp Duty Land Tax (SDLT) is usually payable on the purchase price, at between 1% and 4%, depending on the value of the property; for properties valued at over GBP250,000 (threshold increased from GBP125,000 until March 24, 2012) the rate of SDLT is 1% of the purchase price. The tax rises to 3% or 4% for properties of higher value.

Running a business where there are dedicated business premises (ie offices, warehouse, manufacturing facility) separates the business from the owner(s) of the business. The costs of renting or buying the business premises can be charged to the business as running costs – there will be no tax relief on the cost of the business owner’s home. However, there may be advantages in the company (especially a limited company) buying the property, rather than the individual.

For certain types of business, notably a public house, perhaps doctors and dental practices and professional child care, the business may be operated from the business owner’s own premises (ie a house). Also, in the licensed trade (public houses) where many public house owners live on the premises, HMRC allocates a value to the ‘benefit’ of living in a public house that is also the business.

There are tax advantages in running a business from home. Where a business owner runs their business from their main residence (home) then a portion of the costs of rent or mortgage interest, heat, light & power, insurance, property maintenance and other costs associated with the maintenance of the property can be claimed as legitimate business expenses. The amount of apportionment must fit the HMRC guidelines.

There is usually no capital gains tax liability for gains made when selling one’s main residence. Every residential household is liable to pay Council Tax, the rates for which are set by the local council or unitary authority in the area, based on the value of the property.

If a business is conducted from residential premises, then business rates (which can be very steep) are normally chargeable on the part of the property used for business purposes. Local councils make this judgement on a case-by-case basis, and it is dangerous to assume that unreported business use will go unrecognized; it may in some cases be against the law (zoning or environmental restrictions).

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