Sarah Bradford explains the tax implications of letting surplus business accommodation.
A business may receive rental income in addition to the income generated from the trade or profession which it carries on.
For example, a business that is not using all its business premises may let out the unused part to generate additional income; or the business may hold investment properties, which are let out.
From a tax perspective, not all rental income received in relation to a trade or profession is equal; depending on the circumstances, it may be taxed as trading income or as property income.
Rents from surplus trading premises
A business may not use all its business premises. For example, they may be expecting to expand and have premises that are larger than the current needs of the business to allow for expansion. Alternatively, the business may have experienced a downturn in trade and contracted with the result that the business premises are now larger than they currently require.
Where a business has surplus business accommodation that they are not currently using, it may make commercial sense to let out the unused accommodation to generate additional income and to contribute towards the running costs of the premises. In certain circumstances, it is possible to treat the income that the business receives from letting surplus business premises as a trading or professional receipt rather than as property income.
However, this can only be done where all the following conditions are met:
- the let business accommodation is temporarily surplus to current business requirements;
- the premises must be used partly for the business and partly let;
- the rental income must be comparatively small; and
- the rents must relate to the letting of surplus business accommodation only, and not to the letting of land.
It is important to note here that for the rents to be treated as trading receipts, the let accommodation must be in the same premises as are currently used for the business. If the rental income derives from separate business premises that are currently unused, the rents cannot be treated as trading income.
Where the rents from letting surplus business premises are treated as trading income, any associated expenses are likewise treated as trading expenses and are deducted in computing the trading profit, rather than being taken into account in computing the profits of any rental business that the business may also have.
Separate business property surplus to requirements
A business may have a separate property that is surplus to their current needs. This may arise (for example) following the closure of one site or division, or following a move to new business premises while retaining the old premises.
If a separate business property is let, any rental income is taxed in accordance with the property income rules; there is no option to treat the rental income as a trading receipt.
However, if the surplus business property is not let or (as the case may be) sublet, expenses of the unused property can usually be deducted in computing the business’s trading or professional profits. However, for this to be the case, the business must have taken on the obligations of the surplus property `wholly and exclusively’ for the purposes of the trade or profession. This test would generally be met if the business took on the lease of a property for the purposes of their trade or profession. However, it would not be possible to deduct expenses associated with a private property or a rental business property in computing the trading profit, as the `wholly and exclusively’ test would not be met.
If the property has been acquired for the purpose of the trade or profession and becomes surplus (e.g. before the end of the lease) and the property is sublet, the rents are taxed as rental income but without any deduction for associated expenses where these are deducted in computing the trading profits. Although the expenses are not incurred ‘wholly and exclusively’ for the purposes of the rental business, they can instead be deducted from the rental income rather than in the computation of trading profit if the business prefers. This may be beneficial if (for example) the business is loss-making and there is insufficient trading income against which to set the expenses but they can be utilised against the rental income.
If the expenses exceed the rental income, they can be set against the rental income in the first instance, with any excess being set against the trading income. This will prevent a loss arising on the rental business that can only be set against future rental profits. However, the expenses must be incurred ‘wholly and exclusively’ for the purposes of the trade to benefit from this approach.