By Shiniade Kenworthy
In previous articles the benefits of owning residential investment properties in a trust have been detailed. Do those benefits apply to commercial property?
Firstly, what is commercial property? Commercial property includes property such as agricultural land, an apartment block (consisting of more than five units), hotels, land for property development, industrial premises, retail premises, and any other property that has been zoned as commercial property.
Due to the nature of commercial property being quite distinct from that of residential property, there is a mistaken belief that commercial property must be owned by a close corporation and/or company. This is not the case and in fact for the most part we advise against it. There are certain circumstances where it is advisable to utilize a company but these instances are limited. Only in circumstances where income tax advantages outweigh any CGT (capital gains tax) and dividends tax disadvantages would it be advisable to utilise a close corporation and/or company. If you receive a large number of rentals and have multiple shareholders and/or members, for example, it is advisable then to purchase in a close corporation and/or company.
Asset protection is always foremost when any structure is considered. If you should own your commercial property in a company or close corporation, to ensure asset protection, you would still need to have a business trust to house the shares and/or members interest. This then involves a more detailed and costly structure. Furthermore, by structuring your commercial investments in this manner you may be exposing yourself to higher tax burdens. Another error that entrepreneurs make is to hold their commercial property in their trading entity. To do so would expose your property to the risks of the business. By housing it in a separate trust you are ensuring that the property is protected from said risks.
When purchasing commercial property, there will be different consequences based on the VAT status of both the entities.
A commercial property may be sold as a going concern if it is being conducted as such. It is essential that all the provisions of Section 11(1)(e) of the Value Added Tax Act are complied with, failing which there could be disastrous consequences for the parties. You must ensure that both parties are VAT registered and that a VAT invoice is duly issued. When entering into the transaction always ensure that a properly drafted agreement is in place between the entities. In this instance the transaction is a VAT neutral sale resulting in only transfer costs and CGT implications (effectively 14%), no transfer duty will be payable. A cautionary word, though, a cash flow problem may arise (if you do not have any reserves) as you will need to pay the VAT before you can claim it back.
If the entity from which you are purchasing the commercial property is VAT registered but your trust is not, your trust will pay 14% VAT on the transaction. Any commercial property investment trust should be VAT registered as, unlike with residential property, you are entitled to charge VAT on commercial property. This scenario should thus rarely occur.
If the commercial property investment trust is VAT registered but the entity from which you are purchasing the property is not, the transaction will attract transfer duty at 8%. The transfer duty you pay, however, will be claimed back on your first return.
It is therefore evident that, save for a few instances, it is advisable to house your commercial property in a trust. It must; however, be a separate trust to that of your residential property investment trust as if more than 50% of the value of the properties are residential properties then you will lose your VAT status.