Direct or Indirect?
You can invest directly in commercial property by buying and owning it either in your own name or with co-investors or partners. You will receive the rent and eventually you may sell the asset on at a profit. Alternatively, you can invest indirectly by acquiring a share in a property investment fund or company that owns commercial property and you will look to receive a share of the income and gains received in the fund via dividends or by later selling your share in the fund at a profit.
What Are The Tax Implications Of Direct Investment?
First, on the purchase of a commercial property, you will have to pay Stamp Duty Land Tax (or its Welsh or Scots equivalent). In England and Northern Ireland, the tax bites on non-residential or mixed residential and non-residential property for more than £150,000 and is charged at 2% on the slice of the price between £150,000 and £250,000 with the remainder charged at 5%. If you are buying residential property to let out and already own an interest in another residential property, you will pay the tax at rates of between 3% and 15% on purchases for £40,000 or more.
Second, you will pay income tax at your normal rates on any rental income after deducting allowable expenses, including mortgage interest relief, although this is restricted in the case of buy to let residential investments – see here for further details.
Third, if you sell a commercial investment property at a gain, you are likely to have to pay capital gains tax on the gain. If you are a basic-rate income taxpayer, you will pay tax on the gain at 18%, but if you are a higher or additional-rate taxpayer, you pay tax at 28%, in each case on any gain above the annual CGT allowance of £12,000 in 2019/20. Couples who jointly own a property can protect a gain of up to £24,000 from CGT.
If you invest in commercial property through a property investment fund, a company, a partnership or a self-invested personal pension, there are different types of tax charges.
A real estate investment trust, or REIT, has two types of businesses for tax. First, a property letting business which is exempt from corporation tax in the REIT, but the REIT pays out any share of profits to you after deducting basic rate income tax.
Second, property management services and the like are taxed in the REIT and then paid out as dividends to you with the usual tax credit attached. There are also Property Authorised Investment Funds or PAIFs which are similar to REITS. There are also other forms of property investment funds but which do not enjoy the tax advantages of REITs and PAIFs and you can also buy shares in property investment companies listed on the stock exchange.
For advice in relation to tax and investing in commercial property, contact Patrick Cannon today.