Own Your Business Property Instead of Renting

Are You Looking to Own Your Business Property

Instead of renting space for your business you can own the property. Low down payment and low interest rates available for small businesses. The advantages are just like owning a home versus renting your home. The opportunity is even grater in this market. Today the prices of commercial property continues to go down. This makes us near bottom in prices. Prices are where they were 4 years ago. Just like investing in stock or any thing else it is always best to buy low. Now is the time to own the property you operate your business out of instead of renting.

SBA 504 Program

The conditions for small business owning commercial property just keep getting better. The 20-year fixed interest rate on SBA 504 loan projects has fallen to 4.93% — the second-lowest monthly rate in the 24-year history of the program. Put that together with decreased commercial property values and all the inherent benefits of the SBA 504 loan program (as little as 10% down; longer terms, below-market fixed interest rates), and you have a “perfect storm” for Smarter commercial property ownership.

Additional Income as Well

When you own the property you operate your business out of you create equity as you make payments and as the property appreciates. If you choose a mixed use property and your business occupies at least 50.01% of the square footage, you can collect rent and even lower your costs of doing business. Now is the time to own your business property.

Commercial Real Estate Loan

Even though financing is tight if you have good credit and have been in business for 3 years you can qualify for financing with as little as 10% down. Even if you have not been in business for 3 years a start up company may qualify for rates with as little as 15% to 20% down payment. This is lower than all other commercial real estate loans for single use small businesses. Take advantage now!

Creative Financing Options

With the commercial real estate market in an uproar many sellers are willing to work with buyers to help them qualify for financing. Yes it is a buyers market today. This means that there are many opportunities for creating financing options. This can help you qualify and own today while the best opportunities and prices are available with the lowest interest rates in years. So seriously consider the benefits to owning your business property instead of renting.

Long Term and Short Term Business Property Loans

Commercial property is usually both a major investment for any business to make without having raised some form of debt finance, as well as being a large store of value that a business can use to raise cash from when needed. This article covers the different types of business property loans that are available such as commercial mortgages and bridging loans and how to go about raising a business property loan.

Commercial mortgages

A wide variety of institutions including banks, building societies, insurance companies and asset based lenders provide mortgages against commercial property. These can be either ones which are owner occupied or investment properties that are rented out.

Despite the credit crunch these is still a reasonable availability of this type of funding so long as there are no major problems with either the property, such as environmental issues, or the company which means it has to have been both profitable over the prior three years in total and had no catastrophic trading losses in any one year.

Advances from banks are usually around 60% to 65% of Open Market Value (OMV) while through other funders you may be able to raise up to say 70%, depending on market conditions and the strength of your proposal.

If an applicant or a related person (which is defined as a spouse, common law partner, parent, sibling, child, grandchild or grandparent) lives or intends to live at part of a property being offered as security, and the living accommodation comprises over 40% of the property, the loan will be regulated in the same way as domestic mortgages. In this case you will need to obtain advice from an Independent Financial Advisor (IFA).

Funders will need details of the property involved and its current value as well as details of the rental income or the business’s trading performance to assess your ability to service the loan.

Bridging

As an alternative to a long term commercial mortgage, there are a limited number of serious players in the commercial property bridging market. These offer short term loans, typically on a six or twelve month term, of up to 70% of OMV (or 60% on a second charge basis).

Bridging is always however expensive money and you should expect interest rates of between 1% and 1.75% per month. Against this, bridging loans can be arranged quickly and being interest only (which can also sometimes be ‘rolled up’ into a bullet payment due on redemption), can even have short term cash flow advantages over loans at cheaper interest rates.

So why take the risk? Well bridging loans can be obtained quickly and can therefore be used to raise cash in an emergency or to take advantage of an opportunity. They are also usually based on valuation rather than purchase price so can provide higher funding in situations where a distressed asset is being bought. They are also largely based simply on the underlying security value of the asset and so can be used in circumstances where a business does not have the accounts required with which to obtain a normal commercial mortgage at the outset.

Given how expensive this type of loan can be you should only ever take a bridging loan out if you have a clear idea as to how you are going to be able to repay it and you should take advice from a broker who knows the market.

Sale and leaseback

With a sale and leaseback the property is sold to an investor which allows you to realise its full value. You then lease the property back typically over 15 or 25 years on normal institutional terms with, for example, rent reviews every five years. The investor will then be looking for the rent charged to provide a reasonable yield against the price paid for it.

As an investment, this type of transaction is usually only relevant to larger properties of over say £500,000 in value, and in addition to the bricks and mortar value of the building, investors will be concerned about the strength of your business as a ‘covenant’ which means your likely ability to pay the rent into the future.

Sale and leasebacks are often very useful in MBO/MBIs and other business acquisitions, as the ability to realise 100% of the open market value eliminates the need to tie up some of the available equity in bricks and mortar, as would be needed with a commercial mortgage of say 70%.

In some cases, the actual sales price achieved can be in excess of the surveyor’s opinion as to OMV and/or the value attributed to the property in the business sale and this can result in an injection of working capital into a Newco at the outset.

Pension purchase

For some businesses it may be possible and appropriate for the company or directors’ pensions scheme to be the investor in a sale and leaseback arrangement, raising a mortgage and purchasing the premises from the company as described above. This injects funds into the company from the realisation of the property, while the property is under the control of a known party and in some cases the pension scheme may be able to borrow more cheaply than the company can.

Pension schemes must have the appropriate structure and borrowing powers to undertake this sort of transaction so you will need to take specialist advice and assistance from an Independent Financial Advisor (IFA) with experience in this area.

PRESERVE YOUR INHERITANCE – Using Business Property Relief

BPR: The basics

Undoubtedly, the relief from IHT for business property is the most powerful relief in the whole of the UK’s IHT code. An interest in a business or shares in a company qualify for relief at 100%, that is their whole value is completely left out of account in charging the tax on death or lifetime gifts. Any kind of business will qualify for the relief, so long as it isn’t trading in shares or land etc., or a business of making or holding investments.

Fifty per cent relief is available for certain assets, like properties, that aren’t actually held within the business but are used for the purposes of a business, which you are carrying on either personally or through a company you control.

Furnished holiday lets

The question of whether a business is investment or trading in nature is a very topical one at the moment, in the context of furnished holiday lets. The case of Pawson recently heard at the Tribunal represented a runaway victory, or so it seemed, for the taxpayer. Reading between the lines of the case, it looks as though the old lady whose IHT was in question actually did very little but receive the rents from holidaymakers who visited her cottage in East Anglia. This therefore put her squarely within the Revenue’s new practice (it changed its approach a few years back without telling anyone), and even though furnished holiday accommodation is treated as a trade for other taxes, it isn’t automatically treated as a trade for IHT. The Tribunal thought otherwise, but unfortunately this case has been overturned more recently on appeal.

So, at the moment, owners of furnished holiday accommodation have no idea whether their asset will qualify or not. In a way, the judgment of the appeal judges is just as attackable in the opposite direction as the original judgment in favour of the taxpayer was. They both almost said the equivalent of ‘it stands to reason that furnished holiday letting is a trading/investment (delete whichever is applicable) business’. Our own view is that some businesses will qualify and others won’t, depending on how active the owner’s involvement actually is. The more active, the better.

But so much for the basics. What were those interesting tax-planning ideas we were talking about?

1. Turn 50% (or 0%) relief into 100% relief

It’s surprising how often people get this one wrong. We’ve just mentioned the rule that says that if you hold a property outside the business you get 50% relief if the business itself qualifies. But this relief is only 50%. Indeed, it’s worse than that if the business is carried on by a company and you, as an individual, don’t actually control that company (for example if you own the shares 50/50 with a business partner). In this instance, holding the property outside the company is a tax disaster, because you get no BPR at all, even if the property is fully utilised in a trading business.

Even worse is the situation where the business property is held in a separate company, which you own in parallel with your trading company. If you do it like that, you haven’t just fouled up your IHT planning position: you’ve also made a pig’s ear of your capital gains tax as well!

People often set up things like this to ring-fence what may be the most valuable business asset (the property) from any financial disaster that might strike the trade itself, for example a disastrous legal claim or losses made for other reasons.

But there is a way you can get the tax benefits without endangering the property asset in this way. One version of this is to put the property in a holding company which then owns the shares in the trading subsidiary company. Because, overall, you are looking at a 100% trading position, your shares in that holding company will qualify for 100% relief. There is an equivalent, which is arguably even better from the point of view of other taxes, in the context of LLP-based structures.

2. The ‘50% rule’

Clever use of the ‘50% rule’ will enable you to get relief for assets that are not actually trading in nature at all, but merely investments.

How can this be, when we’ve just said that BPR isn’t available for investment businesses, under the heading of ‘The basics’ above?

Simple: BPR is only denied if the ‘business’ in question comprises ‘wholly or mainly’ the making or holding of investments. The Revenue, no doubt correctly, interprets wholly or mainly as meaning more than 50%. Ergo, if your business is no more than 50% investment in nature it will still qualify for the relief in full.

So if, for example, you are in partnership and that partnership has assets (perhaps property or goodwill) worth £1 million, there’s no reason why you shouldn’t smuggle in a buy-to-let property, which would normally be treated as a fully IHTable investment, into the business. Its value will then form part of the overall value of a business which comprises at least 50% trading assets, and therefore is eligible for relief.

3. Property development or property investment?

Regular readers of these words will be familiar with this principle. Where you have a property portfolio, the question of whether its value is taxable on your death or on lifetime gift is one of what is going on in your mind. Do you hold the properties for the purpose of developing and selling at a profit or do you hold them for the purpose of long-term rent? If the former, you are a property developer with a business that is 100% outside IHT. If the latter, the whole value of the investment property portfolio is chargeable, in principle, at 40%.

So why is this mentioned in a list of planning points?

The answer is, because the distinction depends entirely, in the final analysis, on your intention. And intentions can change. Let’s take the example of the elderly person, perhaps in ill health, who has held a portfolio of properties for some years without change, and is living off the rents.

This is a prime candidate for planning of this sort, because if nothing is done to change that old person’s intention (which the Revenue will assume to be an investment intention) the whole amount will fall into his estate, and that could be rather soon.

He could, if circumstances were right from the commercial point of view, enter into partnership, perhaps with younger members of his family, with a view to developing the portfolio actively for sale. In principle, there is no reason why the whole portfolio should not thereby be transformed, literally overnight, into a completely non-taxable asset. But you need to make sure that the evidence is there, and one way to do this is to change the whole structure within which the portfolio is held into a corporate structure, more associated with trading businesses.

Note that this overnight transformation even gets round the normal rule that applies for BPR to the effect that you must hold the business property for at least two years before it qualifies. (This rule was clearly brought in to prevent ‘deathbed planning’.) The rule doesn’t say that the properties concerned need to have been business property for two years: merely that they need to have been owned for at least two years.

4. Double-dipping

This is one of our favourites, and works like this. Mr A has just died, leaving the shares in the family trading company, worth £1 million, together with £1 million cash, to his widow. As a bequest between spouses, this is completely exempt from IHT.

Mrs A, when she has recovered from her grief, consults a tax advisor, who suggests that she vary her late husband’s will to leave the shares in the family trading company to the children. This she duly does, leaving behind the £1 million cash that she has received. The variation of the will doesn’t give rise to any IHT, because of BPR. Fine.

The next stage, perhaps after an interval, is that Mrs A offers to buy the shares in the company back from the children. She pays them £1 million cash, and therefore they have the cash and she has the shares. (They make no capital gain because they are treated as having acquired the shares in the company at probate value on the death of the old man, that is £1 million.)

On Mrs A’s subsequent death, she leaves the shares back down a generation again, and the same shares therefore qualify for BPR again.

The result? The £1 million cash, which would have borne tax on Mrs A’s death, has been passed down a generation without IHT, by way of ‘double dipping’.