How commercial property is taxed
My company is considering diversifying its investments by purchasing and renting Guernsey commercial property. How will this be taxed?
Caley Clarke, tax senior manager at BDO Guernsey, replies:
The commercial property market presents a popular choice for companies wanting to diversify their investments.
Whether the property is owned directly or by a company, the income arising will be subject to a 20% tax rate. To calculate the taxable amount, the allowable expenses should be deducted from the gross rent arising during the calendar year.
This can be quite a complicated calculation as the expenses are allowable in different ways.
To begin with, deduct any direct expenses, which would usually be a tenant’s responsibility such as utilities and occupier’s rates, from the gross rent. If the lease provides that the landlord pays for all repairs a 10% ‘statutory repairs allowance’ may then be deducted, regardless of actual expenditure incurred. If the landlord only pays for external repairs the Income Tax office will generally accept a claim for an allowance of 5%.
Actual property-related expenses paid during the year, such as repairs, estate agents’ fees and insurance, are included in an ‘excess repairs allowance calculation’. These expenses are then averaged over five years and any amount in excess of the statutory repairs allowance is then deducted from the rental income.
If the purchase of the property was facilitated by a loan then the loan interest paid during the year can also be deducted.
Finally, any permissible company management expenses, such as administration and accounting fees, may then be deducted as long as they are incurred wholly and exclusively for the purposes of managing the company.
Expenses which are not allowable would include TRP, pre-letting expenditure and any expenses of a capital nature.
The resulting net rental profit is then declared on the tax return and is taxable at 20%. When dividends are declared to shareholders a 20% tax credit is available and no further tax will be payable by the company or the Guernsey resident shareholders.
n For more information, contact a member of BDO’s tax team