Our accountancy expert Michael Cahill answers your questions about investing in property for business use and that all-important one about stock holdings and the possible tax relief that a loss might generate
“I have been offered an exceptionally good deal, through family connections, to buy premises rather than rent them and apart from the ground floor shop and basement storage area, there is an upstairs flat which I could rent out if I choose. The entire property will cost me £350K which is roughly what I have inherited from my late father after paying Inheritance Tax. What I need to know is what is a sensible budget to spend on refurbishment. I want to do the right thing here and not let my imagination run away with me.”
Purchasing property can be a good investment for a business but you should seek specialist advice before doing so to ensure that you consider who should buy the property (you personally, a company controlled by you, your personal pension etc) and fully understand the tax and VAT positions so that you don’t miss out on any opportunities in connection with the transaction.
For example, the VAT position needs to be understood as the current owner may have “opted to tax” the property which may mean that VAT will be chargeable on the purchase price – this would also result in an increase in the stamp duty liability. There may also be an opportunity to claim capital allowances depending on the property’s history and whether capital allowances have been claimed in the past.
It is difficult to give you advice on setting the refurbishment budget as this will very much depend on the condition of the property currently and what changes you feel are required for the business. However, it is important that you feel comfortable with the level of spend and you will need to consider your availability of funds so that you can retain sufficient cash-flow to enable the business to continue trading successfully and meet debts as they fall due for payment.
I suggest you speak to a number of different people to get ideas for the refurbishment, and at least three quotes for the work you consider to be necessary. It is important to get a detailed breakdown of the quote as the tax treatment for various items of spend may differ and you will want to ensure that any deduction for tax purposes is maximised.
I would also recommend that a contingency is built in to any budget, as costs can be higher than expected or further work that was not budgeted for could be required.
The tax relief available on the rental property expenditure may be different to that which can be obtained on the commercial property. It is important again therefore to have a detailed breakdown of the expenditure to so that the appropriate tax treatment can be determined.
If the upstairs flat is being let out, the profits from this would be calculated separately to those of your main trading business. You should not automatically assume that if there is a loss in either the rental or trading activity that it can be offset against the profit from the other. Careful planning will be required to optimise your position each year.
It sounds like the property is a fantastic opportunity but please do speak to your accountant and get specialist advice in advance of completing the purchase.
I recently had a sale on everything in my shop and was pleased to clear out a huge number of pieces. Most, however, I have now lost money on. Obviously, my suppliers aren’t interested, which infuriates me, but there must be a way I can claim something back.
You are correct in that it is highly unlikely that a supplier will offer any refund on the items being unsold.
Assuming that you have not written down the stock value of the goods previously, the sale at less than cost will mean that relief is automatically obtained through the accounts of the business.
The original cost of the item will have been carried forward in your stock figure and will now be released against the income received. As the cost is greater than the income, this will create a loss that will automatically offset against the profit made on other items sold during the year.
If you still have goods where the cost or carrying value is greater than the net realisable value – ie sale price less any future costs to be incurred to achieve the sale – you are able to write down the value of those items held to net realisable value, which will reduce your reported profits and achieve tax relief immediately.
In addition, if as a result of the above, your trading profit becomes a trading loss, you may be able to offset the loss against other income in the year, or carry it back to offset against the trading profit from the preceding year and obtain a refund of some or all of the tax paid previously.
The management of stock is crucial to the success of a business and if you have found yourself left with a large amount of old stock it would be advisable to review your current processes to see what improvements can be made. For example, can you agree shorter lead times with suppliers which would allow you to reduce the number of items held for any one stock line? Or are you offering too wide a product range?
The answer for every shop will differ depending on their current product range and customer base but it would be advisable to keep this area under regular review.
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If you’d like to consult directly with Michael Cahill for professional advice, then email email@example.com