Property in a group

Mainly to protect the property from the risks of the trade. If the trading company fails, its assets go to its creditors; premises owned by a sister property company are not the trading company's assets. A separate property company also makes it easier to sell the trading business without the building, to bring in a different lender, or to pass the property and the business to different family members later. The rent paid between the companies keeps it commercial.

Three things in particular. Relief is not available if, when the transfer happens, there are arrangements for the property company to leave the group, or for the consideration to be provided by someone outside the group. It is also denied where the transfer is not for bona fide commercial reasons or has tax avoidance as a main purpose. So a transfer made shortly before an agreed sale or demerger of the property company needs particular care.

Relief is withdrawn if the property company leaves the group within three years of the transfer, or later under arrangements made in that period, while it still holds the property. SDLT is then charged on the property's market value at the time of the original transfer, and must be reported on a further return within 30 days. There are exceptions, for example on some liquidations. Selling the trading company is treated differently, but a later change in control of the property company can still trigger a charge.

Not immediately, where both companies are in the same 75% capital gains group. The transfer is treated as taking place at no gain and no loss, so the property company takes over the trading company's base cost. But if the property company leaves the group within six years while still owning the premises, a degrouping charge can arise, calculated as if it had sold and reacquired the property at its market value on the date of the original transfer.

Often, if you have or are planning a holding company. Buying through a new property subsidiary means the building never sits in the trading company, so there is nothing to move later and no group relief clawback period to watch. The purchase is taxed in the normal way, at non-residential SDLT rates for commercial premises, and the lender will look at the group as a whole. Funding usually comes from surplus cash moved up to the holding company or bank borrowing.

A market rent, documented in a written lease, is the safest approach. The rent is usually deductible for the trading company and taxable in the property company, so within the group the corporation tax roughly washes through. A proper lease matters for other reasons: it supports the protection if the trading company fails, it gives a lender something to value, and it makes a later sale or demerger cleaner. A surveyor's view on rent is helpful.

Generally not. For Business Asset Disposal Relief the activities of all the group companies are treated as one business, and activities between group members are disregarded. So a property company letting premises only to a trading subsidiary in the same group is, in effect, part of the group's trading business. Letting space to outside tenants is different: that rent and the value of that space count as non-trading when HMRC weighs the 20% indicators.

Not usually. SSE looks at whether the subsidiary being sold, with any companies below it, was trading throughout the qualifying period. A property company sitting alongside the trading subsidiary, owned directly by the holding company, is not part of what is sold, so it doesn't count in that test. Selling the property company itself is different: it is an investment company, so SSE normally won't apply to a gain on its shares.

This needs care. Under section 18N, commercial letting is a permitted purpose, but a letting to a connected person, which includes a fellow group company, is not treated as commercial. So that heading does not help. However, another permitted purpose is a company existing for the purposes of a trade carried on commercially by a qualifying company in the group. A property company providing the group's trading premises may fall within it, but the facts need checking.

It usually needn't, provided the trading companies make up most of the group's value. Normally, a group company whose business is holding investments is ignored in valuing the holding company's shares for Business Relief, which would strip out the property's value. But there is an exception in section 111 of the Inheritance Tax Act 1984 for a company mainly holding land or buildings mainly occupied by the group's trading companies. That exception stops applying if the premises are let outside the group, for example to a buyer after the trading company is sold.

It can, because of the associated companies rules. The 19% and 25% corporation tax limits are divided between all the companies under common control that carry on a business, and a property company letting premises carries on a business. In a group of a non-passive holding company, a trading company and a property company, each company's limits fall to one third. For groups already paying the 25% main rate on most profits the difference is small.

Yes. Many lenders are comfortable lending to a property company that owns commercial premises let to a trading company in the same group, with a lease in place. Lenders often ask for cross-guarantees from other group companies, which can weaken the separation you created, so the terms are worth negotiating. Interest on the borrowing is usually deductible for the property company against its rental income.

Yes, and this is a common reason for the structure. The holding company sells the trading subsidiary, often with the substantial shareholding exemption, and keeps the property company. The buyer then takes a lease from the property company, so the group keeps a rental income. If the property was moved from the trading company within the last three years, check the SDLT position before the sale, because a later change in control of the property company can trigger a clawback.

Usually by a demerger, so you own the trading group and the property company side by side rather than one under the other. The statutory demerger rules are aimed at trading businesses, so property is often separated through a capital reduction or a liquidation demerger. Each needs HMRC clearances and careful planning for capital gains, stamp duty land tax and the anti-avoidance rules. It is best planned well before any sale.

It depends on your aims. Personal ownership puts rent directly in your hands, taxed as income, and keeps the property out of the company structure, but the property is then exposed to your personal position and part of your estate outside any company planning. Group ownership keeps the rent in the companies at corporation tax rates and supports the protection and inheritance tax points above. Moving property in either direction later can trigger tax.

Generally, yes, if the rent is a genuine business expense at a commercial level. The rent is a deduction for the trading company and taxable income for the property company. If one company makes a loss and both are in a 75% group, group relief can usually let one company's loss reduce the other's profits. Rent well above market value invites challenge, so a proper lease at a market rent is the best protection.

It can, but buy-to-let or commercial property let to outsiders changes the picture. That rental business is non-trading, so it counts in the 20% indicators for Business Asset Disposal Relief, and falls outside the inheritance tax exception for property occupied by the group. (Letting to unconnected tenants on commercial terms doesn't of itself make the property company a close investment-holding company.) If you plan to build an investment portfolio, it is often better held outside the trading group altogether.

Not in tax terms. A property company that only owns premises used by your group's trading companies behaves, for most purposes, like part of the trading group. A property investment company letting to outside tenants is running a separate investment business, with different consequences for reliefs and corporation tax. The legal form is the same, but HMRC looks at what the company actually does and who occupies its buildings.