Chris Thorpe looks at some of the implications of owning assets personally which are used in the owner’s company or partnership.
It is very common for a business owner to bring that business’ premises or land into a limited company with the rest of the business upon incorporation, or to place those assets within the partnership through a capital account.
However, plenty of business owners will retain the premises or land personally, perhaps also charging their business rent to give themselves an extra source of income. Placing land and buildings into a limited company in particular can cause issues with stamp duty land tax; and maybe the owner does not want the asset’s ownership being shared with other partners or shareholders.
Whatever the reason for keeping the land or buildings out of the company or partnership, doing so has both tax and succession consequences.
Tax considerations
Firstly, whereas the value of any land or buildings within a trading business attracts 100% business property relief (BPR) for inheritance tax (IHT) purposes via the shares in that business, assets owned personally only potentially attract a BPR rate of 50%.
Secondly, whilst business asset disposal relief for capital gains tax (CGT) purposes is available upon the sale of such assets with a corresponding sale of the business, relief is denied where a market value rent is being paid by the business. This applies to ownership periods from 2008, with relief restricted on a sliding scale according to how much rent is charged. Full market rent means no relief; at the other extreme, no rent will give full relief. Such rent remains subject to income tax without the benefit of the £1,000 property allowance, which is not available for rental income coming from partnership property or that occupied by a connected company.
Legal issues, etc.
There are also legal and succession issues to having assets off the balance sheet. The destiny of assets owned by a business is governed by the partnership or shareholders’ agreement; that of personally owned assets is subject to the individual’s will.
Sometimes, there may be uncertainty as to whether an asset is owned personally or by the business and, thus, which document governs its fate. Generally, whether an asset is partnership or company property depends on who bought it originally or if it was properly introduced to the business and declared accordingly. Whether it is on the accounts’ balance sheet is only an evidential factor and not decisive. The case of Wild v Wild [2018] EWHC 2197 highlighted the issue.
In that case, two brothers were in dispute with their mother about what should happen to the family farm. There was no partnership agreement in place, and with father having pre-deceased leaving the farm to their mother in his will, there was a dispute as to whether the property had belonged to the partnership, or to father personally. If the former, all the assets would have been shared between the brothers as partners on father’s death; if the latter, then the property would follow father’s will and now belong solely to mother.
The High Court held that the assets were owned by father, as there was insufficient evidence that it was ever partnership property, despite its being on the accounts’ balance sheet.
The final word
There are many good reasons for retaining assets personally, but the loss of 100% BPR is often reason enough not to. Whatever the decision, making it clear in writing who owns what is vital for the purposes of both tax and avoiding messy legal arguments later.
The best option, if at all feasible, is for the asset to be placed into the owner’s pension. That way, it is outside their estate for IHT purposes, so BPR is irrelevant and full market rent can be received by the pension trustees income tax-free. Upon any subsequent sale, the growth in value of the asset is also CGT-free; and upon death, the owner’s beneficiaries can still inherit it via the deceased’s letter of wishes to the trustees.
