Finding the right premises is often critical to the success of a business. For many, leasing those premises will be the answer, giving them the flexibility to move or grow as the business expands.
Yet, just as residential property values have increased, so too has the value of commercial premises. Business owners may well be tempted to acquire a property for their own business or as an investment. It should not, however, be a decision a business owner takes lightly as it can tie up a lot of capital.
Before committing sizeable sums of money to a commercial property, business owners may want to consider the following points.
Location, Location, Location
As the popular TV series reminds us, location is the key to residential and commercial property alike. A shop, for example, in the wrong location is unlikely to be a success. Where passing footfall is not so important – for example, an office or industrial unit – location still matters. Accessibility to staff, availability of parking and any deliveries will need to be factored in.
When committing sizeable amounts of cash into bricks and mortar you will want to make sure those premises will suit the business as it grows. Yet you will not want to over-commit and tie up valuable cash in premises that are too big. Taking advice from an experienced commercial property agent can help you reach the right decision.
Fit out costs
In addition to the cost of purchase, renovations and fit-out costs will need to be factored into your plans. Commercial buildings will need bathrooms, kitchens, meeting rooms and the space for retail, manufacturing plant and machinery or desks.
Commercial property is assigned specific use classes that determine how premises can be used. Class E, for example, includes retail, restaurants, financial and services, and office use. Class B2 permits industrial and Class B8, distribution and warehousing. Whilst it is possible to change use it is not always straightforward.
There are many ways a business can fund the purchase of commercial property, including a mortgage, commercial loan, bridging finance or from reserves. All will have different tax positions and implications on cash flow. It is recommended a business take advice and fully understand the financial implications of the preferred funding route.
When considering the amount of funds you require, you will need to take into account that
Stamp Duty Land Tax is payable on the purchase of the commercial property. Commercial premises can take advantage of the lower rates (compared to residential property), however depending upon the purchase price, this can be up to 5%. Also, a new leasehold commercial property not only pays Stamp Duty Land Tax on the purchase price but can also be subject to Stamp Duty Land Tax on the value of the annual rent too (if the threshold is met).
Businesses are often forgetting that Capital allowances can be claimed on the plant & machinery within the commercial property they’ve purchased, and this includes assets that are intrinsic fabrication of the commercial building, such as heating and cooling systems, emergency lighting and security systems. Capital allowances reduce the taxable profit your business makes and therefore reduces the tax payable.
Owning the property in the business can result in the property being exposed to the full risk inherent in the business activity.
Before purchasing the commercial property, we would always recommend that you seek advice surrounding how to structure your purchase as this can potentially have a big impact on taxes.
Get in touch if you would like some advice on this.