Buying a commercial property to house your business

If you are buying a commercial property to house your business it can be a difficult to know what is the best way of purchasing it. Do you buy it yourself and rent to the company, or buy it in your business or pension scheme?

Which ever way you purchase the property you would think you would receive all the perks to owning it outright. However, there are pros and cons between buying as a business or as an investor.

Advantages of your business buying the premises as opposed to leasing them from a third party:

• You will build equity as values rise and can save a small fortune in the price of property rental.
• Once you have bought the property you have much more freedom to use and alter it provided all the planning permissions are in place.
• If you eventually outgrow your existing premises you can either decide to lease it to gain extra income, or sell it in order to generate extra capital. Chances are you will also be able to roll over any capital gains (unless it’s a residential property).
• If you have outgrown the building you can move as you are unlikely to tie yourself into a fixed-term rental contract.

Business vs. Investor purchase

Buying as a company can be beneficial, but not all companies will be able to make this kind of large purchase. The majority of lenders will require at least three years worth of accounts before they will even think about lending your business the money it needs to buy the commercial property. There are several pros and cons that you will have to weigh up when making the decision as to which is the best way to purchase a property:

1) Investors are sometimes charged higher rates and need to have bigger deposits

As an investor you are seen as a greater risk by lenders, this is because you aren’t personally invested in the property. Therefore investors generally receive higher rates than businesses and will require a larger initial deposit in order to secure the mortgage.

2) If buying as a business you don’t need to worry about rent

What you may not know is that if you buy as an investor on behalf of a business, you’ll need to charge the business rent. This may not sound like a big deal, but you will also be required to pay stamp duty on the lease, which can run up into the thousands. If you buy the property as the business then there is no need to worry about setting up rental, you simply pay the mortgage out of the business account.

3) It can be difficult for investors to get money out of the business in order to make purchase

If the investor, or business owner needs £100,000 in order to secure a deposit, but the funds are held in the company then it can be difficult to release the cash. If you plan to make a large withdrawal then you should expect to be liable for tax on this amount. Unless the investor already has the cash needed for the deposit, it can be much easier for a business with the funds to make this purchase. This is why some businesses invest into a pension scheme which in turn becomes the investor.

4) Investors can profit from the rent

A major benefit to buying as an investor is that you can charge more rent than the cost of the mortgage. This is not something that can be done when buying as a company but can be very tax advantageous in certain circumstances.

5) There can be issues if the company or the investor go bankrupt

The issues associated with going bankrupt should be considered when buying the business premises. If a business goes bust then the building they are housed in will be sold off in order to help cover their debts. On the other hand if an investor becomes bankrupt, then the building will be sold to another interested party and the business will likely continue to lease the premises.

6) Investors may benefit from portfolio loans

Unless the business buying the property deals in property acquisition, they are unlikely to be able to get a specialist portfolio loan. These give much better rates on mortgages and allow you to group several properties together under one loan and typically giving much better rates than individual mortgage. Portfolio investors may be able to get a portfolio loan and group their latest acquisition in with their other investments.

7) Lenders will investigate all of an investor’s circumstances

On application for a loan lenders will look at both an investor’s personal circumstances and finances along with the business’s accounts. This means that more information may need to be provided and everything needs to look attractive for the lender to agree to the mortgage.

8) Buying a commercial property as an investor via a pension scheme

The advantages are that you may be able to invest money in the business into a pension scheme and get tax relief. The rental profit and capital gains aren’t taxable either. The disadvantages are that a pension fund can only borrow one third of the total value of the fund. Also, when the property is eventually sold then you will need to be at least 55 to access the proceeds of sale and only 25% of the fund value will be avaible to draw tax free at that time.

If you would like assistance with any type of commercial finance please do not hesitate to fill out the contact form below and I would be pleased to assist 🙂

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