Saving tax on property sale
AH writes: Six years ago I bought a freehold commercial property through a self-invested personal pension (Sipp). The premises were occupied by my company and other tenants. The other tenants left two years ago and we have not managed to replace them.
We have therefore considered converting the property to two residential flats and then rent them out or sell them. The property was originally a residential home but has been used for offices for 30 years. We accept that the Sipp will no longer be able to own the property. We would like to know the tax implications of such a transaction and whether we should hold the flats personally or through my limited company.
As you say, the Sipp is not allowed to own residential property and so you or your company will need to buy the property from your Sipp before you start the conversion, writes Chris Lane, a partner in Kingston Smith LLP.
If you were to buy the property personally from the Sipp, do the conversion and then sell the flats, you would be subject to tax on any profit. HM Revenue & Customs may wish to treat this as a trading profit and so charge income tax rather than a capital profit, which would be subject to capital-gains tax (CGT). It will depend on the precise facts.
The tax rates would not be very different, but for CGT you will have an annual allowance to use. The maximum rate under income tax or CGT will be 40%.
Alternatively, if your company bought the premises and carried out the same work and then sold the properties, it would be subject to tax on the same profit. The rate of tax will depend on the level of profits of your business, including the gain. If this is less than £300,000, the tax rate will be 19%. This is lower than the personal rate but, remember, the net profits are still in the company rather than in your hands. To be in the same position you will then have to extract the profits from the company, possibly by a dividend. If you are a higher-rate taxpayer, this will incur a personal income-tax charge of 25% of the net dividend received.
If you rented out the flats, the rental profits would be taxable income for yourself or the company.
The tax liabilities are not that different between the two options, but the use of your CGT annual allowance, if possible, would be an advantage and therefore tips the balance to owning the property personally.