Buying property in a different legal entity

Safeguarding the property

You might want to keep the property out of your trading business because of the risk that you could lose the asset if your business suffers financial problems. This is particularly relevant because of the current economic crisis.

For VAT purposes, each legal entity is treated separately - the exception is if two entities are closely connected by economic, financial and organisational links where HMRC can issue a direction to treat them as a single entity if one or both of them is not registered for VAT. But that would not be relevant here.

If company A owes VAT to HMRC, it cannot chase company B for this debt, even if both companies have the same directors.

The exception is if both companies are members of the same VAT group where each member is jointly and severally liable for any VAT debts owed to HMRC.

Separate entity to buy property

If you trade as, say, a limited company, you could form a separate company to own the property, or it could be owned as a partnership between the directors or shareholders. The new entity will then rent the property to the trading business on a market value basis.

A jointly owned building is always classed as a partnership. It is sometimes thought (wrongly) that each joint owner separately registers for VAT as a sole trader but that is not the case.

Rent must always be charged on a commercial basis. A peppercorn rent will not be classed as a business supply for VAT registration purposes.

Registering for VAT

If you form a separate entity to buy the property, you will want to claim input tax on your purchase, i.e. where the seller has opted to tax the building so is charging you VAT. In most cases, you will be able to register the new entity for VAT separately and make an option to tax election on the building at the same time. Your future rent to the trading business will then be taxable, so you can claim input tax on your expenses, including the purchase of the property.

Forms to complete and submit to HMRC are the VAT1 application to register; VAT5L property questionnaire; and VAT1614A option to tax notification form.

Anti-avoidance

The exception to this outcome of registering for VAT and claiming input tax is if your trading business is partially exempt and has exempt or non-business supplies exceeding 20% of its total supplies and the property purchase price also exceeds £250,000 excluding VAT.

In such cases, anti-avoidance legislation will prevent you from being able to buy a building in a separate entity, claim input tax on the purchase price and drip-feed irrecoverable VAT over many years on the rent charged to your trading business. The legislation disapplies your option to tax election, meaning that your rental income is still exempt from VAT and you cannot claim input tax on the property costs.