If you have recently inherited commercial property, it’s likely that you have a list of questions regarding your options and how you may be affected by the rules on Inheritance Tax. While inheriting commercial property can present a number of opportunities, it comes with its own unique challenges and therefore, choosing what to do with it is a decision that shouldn’t be taken lightly. Seeking advice from a specialist will allow you to gain a clear understanding of your legal position and whether you should sell or retain the asset; but until then, there are certain considerations worth taking into account.
1. The Property Market
Owning commercial property can be a great way of establishing an additional revenue stream, so choosing to take it on as an investment could turn the inherited property into a gift that keeps on giving. However, one sudden and unexpected change to the market could see your inheritance becoming less of a gift and more of a burden. With the commercial property market in a constant state of flux, deciding to invest in commercial property will always come with a certain amount of risk attached. Major economic events such as the decision to leave the EU earlier this year has inevitably impacted the UK commercial property market; so before you make a decision, you may find it useful to seek advice from a specialist to assess the market.
2. Family Matters
Once you have assessed the market, you’ll have a better idea on whether you want to sell or retain the property. If other family members are involved (e.g. siblings also listed as beneficiaries) this will have to be decided collectively amongst you. Inheritance is a common cause for disputes between family members, and due to the sensitive nature of the subject, it’s easy for disagreements to escalate into costly conflicts if advice or assistance is not sought early enough. If you and your family manage to reach an agreement, it will be up to you to decide your short and long-term goals and determine a strategy in order to achieve them.
3. Inheritance Tax
If investment properties form part of a person’s estate when they die, the equity of these properties will form part of the value of the estate. That means that if the total value of the estate is worth over £325,000, those set to inherit the property will be faced with paying 40% Inheritance Tax on any amount over this figure. However, depending on your circumstances, you may qualify for Business Property Relief. Business Property Relief provides relief from Inheritance Tax on the transfer of relevant business assets at a rate of 50% or 100%. However, when it comes to commercial property, relief will only be available if the land/buildings are to be used for the sole purpose of continuing the business operating from the premises. If you inherit commercial property with the sole purpose of making a profit from the rental income, simply managing the property as an investment asset, BPR will not be available.
4. Income Tax
When you inherit commercial property and decide to take it on as an investment, managing the property and renting it to business tenants, you will have to pay tax on any profit you make. The amount you pay will depend on your circumstances and how much profit you are making. This can be calculated by adding up the amount of rental income you receive and deducting any expenses or allowances you can claim, such as property management companies you have hired to help with the maintenance of the property. It may be worth taking a look at these examples of tax on rental income from the Government’s website to help you avoid common mistakes when reporting your profit to HMRC.
5. Responsibilities
There are three categories of commercial property: retail property, office property and industrial property. Owning any one of these can be incredibly rewarding and lucrative; but don’t forget: you won’t benefit from your investment if you don’t take care of it. Managing a building requires a lot of work - ensuring it is maintained to a certain standard is not only something you are legally obliged to do, but is also essential in gaining and retaining tenants. As the owner of the property, it is your responsibility to ensure that the building is legally safe for your tenants to occupy. As well as regularly carrying out inspections on the building to make sure it’s structurally sound, you must also ensure that basic fire safety regulations are met, the electrics are functioning correctly, gas appliances are regularly serviced and clean running water is available to the occupants. This is only a small selection of the tasks involved with managing commercial property, so you may want to consider hiring a building maintenance company to support you.
Before rushing into a decision on whether or not to take on your inherited commercial property, speak to one of our specialist solicitors today for tailored advice on 01202 292 424.