Buying a mixed use commercial property on single freehold

[columbo360]

Hello,

My wife runs dance classes and we have found a nearby property which comprises of a ground floor commercial part, which would be used to run the dance classes from, and an upstairs residential flat, where we would live. The property is currently on one single freehold title.

As far as i'm aware we have 2 options to finance the purchase
1. Buy the whole property on a semi-commercial mortgage. For tax purposes we would then designate a proportion of the building as commercial and subsequently an amount of the mortgage interest repayments. This would apparently have to be a realistic amount as it could be subject to valuation from the district valuer.

2. Buy the whole property on a commercial mortgage in the name of the business. We would then lease the flat to ourselves from the business. I'm not sure though whether we could do this for say £1 a year, or whether again it has to be a realistic amount? If we could do this then presumably the entire mortgage interest payments would be tax deductable?

Please could someone advise whether this sounds correct, and also clarify the option of leasing the flat from the business. And also if there is a better way in terms of tax savings to purchase the property.

Thanks in advance

[Incredulum]

2a. A person cannot grant a lease to himself. Not possible. (I am assuming the business is a sole trade/partnership not a company - pls confirm. Your wife could however buy it and lease the flat to you - but don't do that.)

2b. "Presumably the entire mortgage payments would be tax deductible." No. Do you really think that would be fair? The payments would not be wholly and exlusively for the purposes of the trade, so no deduction would be due.


So, I think the arbiter of whether you follow 1 or 2 is the bank. I do not think it makes any difference how it is done; your wife is buying a place in which to live. And a place in which to work. But don't try to grant leases or do anything clever.

[columbo360]

No deduction would be due? Surely the interest payments on the mortgage proportional to the commercial element would be tAx deductible? I know the proportion of interest payments put down against the commercial part would have to be reasonable, but what would happen in terms of a lease? Can hmrc prevent you leasing part of the property at a certain rate?

[section 44]

Can hmrc prevent you leasing part of the property at a certain rate?

No. However, HMRC can deny you a tax deduction for the interest payments where the letting is not on commercial terms.

[columbo360]

Thanks for the replies.

I have since been advised that the best arrangment may be to purchase the property jointly, and then charge the business rent. Can anyone give me some advice on how this would effect:

a. Interest payments on the mortgage i.e what would be deductable
b. Tax payable on the additional income
c. Implications for capital gains tax

Also as I understand it business rates are calculated to produce a figure which would be the rentable value of the property. Would it therefore be appropriate (ie with HMRC) to charge the business rent at the same value as the business rate?

Thanks again,

[Incredulum]

I have since been advised that the best arrangment may be to purchase the property jointly, and then charge the business rent.

Why not ask your professional adviser then?


We need to know for starters:

1. Is your wife's business run through a company or a sole trade?
2. Rate at which you pay income tax
3. Rate at which your wife pays income tax

[columbo360]

Thanks for the reply, the advice wasn't from a professional advisor, it was from a mortgage broker. I will at some point sit down with an accountant, but thought initially this forum may give some ideas.

My wife is a sole trader and we both pay income tax at 20%.

Thanks again.

[taxationuk]

Hi

A few points:-

Firstly if the Business rents from you both personally, you will be liable to tax on the rental income.

As the property would be owned personally no deductions would be allowable for interest payments on the mortgage, unless you has two seperate agreements for the purchase of the flat and the business premises.

Finally an element of CGt would be due on the business proprtion of the property upon sale.

There are various planning opportunities available for this type of scenario, but it depends on different aspects such as if you are a sole trader or a Company.

Kind regards

Terry

[Incredulum]

Firstly if the Business rents from you both personally, you will be liable to tax on the rental income.

As the property would be owned personally no deductions would be allowable for interest payments on the mortgage, unless you has two seperate agreements for the purchase of the flat and the business premises.

Perhaps you would be so kind as to explain to me exactly why you consider that s34(2) ITTOIA 2005 (as applied by s272 ibid) does not apply to this situation.

When you have finished, please would you also explain your technical position here. http://www.taxationweb.co.uk/forum/tied-house-and-cgt-t35947-10.html



OP. I think so long as your wife is contributing to the costs of the mortgage to the extent they relate to the borrowings for the dance studio element, then she should be able to obtain a tax deduction. I don't think there is any need for charging rent or otherwise complicating matters.

There may be some debate as to the exact quantum of deductible expense. e.g. flat worth 100k, studio worth 50k. Mortgage is 75k, i.e. 50%. Probably the better argument is that one third of interest costs (50k/150k) are deductible; a more aggressive approach would be that interest costs on 50k of debt (i.e. the incremental on top of your flat) is deductible.