Should you buy or rent your business premises?

Lego man sitting at his lego desk looking worried

 

The decision over whether to buy or rent business premises is a dilemma faced by many business owners. There are pros and cons to both options, and it very much depends on what type of company you have, how it operates and the growth you expect to see in the future. In this article, we discuss the benefits of each option, tax implications and other things you need to take into consideration before finding a commercial property.

 

Capital

To purchase any business premises, you will need to put some capital in and possibly take a commercial mortgage as well. This could affect your ability to borrow money in the future for any new ventures and will have an impact on your company’s profitability.

However, unlike renting you are investing in a long-term asset for the business. Although you do need to remember that the value of a property can go up as well as down, an issue you may not feel so acutely when renting business premises.

By owning your building, it may be difficult to recoup the capital if you needed to do so quickly. You might need to sell at a time when there is a downturn in the market and not have as much capital as you expected as a result of a sale.

 

Cash flow

Rents are usually fixed, meaning more control over your cash flow compared to mortgages where you may be susceptible to interest rate fluctuations.

If you own the building, you will also have increased costs over renting such as building insurance and maintenance.

 

What’s included in the lease

You may assume that anything to do with the material of the building is the responsibility of the Landlord when renting. However, lease agreements do vary, and you need to carefully review the proposed details when looking at renting commercial property to see what you will be liable for.

 

Planning permission

Even if you are renting you may still be required to apply for planning permission to operate your business from the premises.

 

Responsibility

As an owner of any property, you have increased responsibilities. Valuable time could be taken up dealing with the issues that any Landlord would incur. Is this something you want to take on, or would you rather rent and have someone else deal with that stuff?

 

Tax Relief

If you rent your business premises, then it is tax deductible. However, you can’t claim any expenses or allowances for buying business premises. Find out more about what you can claim for here.

 

Capital Gains Tax Relief

As a commercial property owner, you may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘dispose of’) all or part of a business asset, including:

  • land and buildings
  • fixtures and fittings
  • plant and machinery, g. a digger
  • shares
  • registered trademarks
  • your business’s reputation

 

Business Asset Rollover Relief

However, you may be able to delay paying your Capital Gains Tax if you sell (or ‘dispose of’) some business assets and then use all or part of the proceeds to buy new assets. You may then be eligible for Business Asset Rollover Relief. Business Asset Rollover Relief means you won’t pay any tax until you sell the new asset. You may then need to pay tax on the gain from the original asset.

To qualify for Business Asset Rollover Relief:

  • you must buy the new assets within 3 years of selling or disposing of the old ones (or up to one year before)
  • your business must be trading when you sell the old assets and buy the new ones
  • you must use the old and new assets in your business

You can claim relief on assets including:

  • land and buildings
  • fixed plant or machinery, g. a printing press
  • partial relief

There are different rules if:

  • you only reinvest part of the proceeds from selling the old assets
  • the old assets were only partly used in your business
  • you use the proceeds to buy ‘depreciating assets’ (fixed plant or machinery, or assets expected to last for less than 60 years)

 

Corporation Tax

If you are a limited company, then you will need to pay corporation tax on any land and property you own when you sell it – find out more here.

 

Entrepreneurs Relief

Entrepreneurs Relief allows you to reduce your Capital Gains Tax and pay a rate of just 10% when you sell (or ‘dispose of’) all or part of your business, including any business premises you own. You need to ensure that you understand the limitations of this relief and whether you would qualify – find out more information here.

 

Flexibility

When you rent, you can move to different premises, should the need arise, with more ease than if you own the property. However, as an owner, you may have more options to make amendments to your building to negate the need for a move.

It is also worth noting that if you rent, then when you move to a new property you may be required to return the current premises back to their original state, costing you time and money.

Before deciding whether to buy or rent a commercial property ensure you understand the needs of your business over the coming years and whether a move is likely.

 

Future income

If you own business premises you have the additional advantage of still having a valuable asset should your business fold or you choose to sell it. By letting your property, you could provide yourself with an income.

 

Buy or rent?

Whether you decide to buy, or rent will depend on your unique business and how it operates. Start by ensuring that your business plan is up to date, you have completed a risk assessment, you understand the goals and aims of the company over the next 5 years or so and what the projected growth looks like in real terms.

If you have only been in business for a relatively short time, you may want to rent until you have a more consistent customer base and can understand any investment needs. Many new enterprises change their focus in the early years so you want to be sure your company is financially viable before investing too heavily in property that may prove challenging to get rid of at a later date.

It can be beneficial to take an objective look at your company before making any significant decisions and look for efficiencies that could be gained without the need for expensive premises. Working with a Life Centred Business Planner will allow you to ensure that any decisions you make are aligned with the strategic goals of your organisation and the solution is appropriate for your needs now and in the future. Contact us today for a complimentary one hour consultation to to discuss your needs with one of our Life Centred Financial Planners.

 

Further information

If you found this information useful you may also want to check out the following:

Considering selling your buy-to-let property?

Building a succession plan for success

How can your company provide you with financial security?

 

MRA help individuals, businesses and families achieve the best quality of life they can with the resources they have. MRA specialise in corporate solutions, cash-flow analysis, taxation, debt management, savings and investments, lifestyle planning and much more.

Business Consultants based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells.