For many family businesses, the premises they operate from is central to both their legacy and their day-to-day operations. Yet when it comes to the ownership of that property, things aren’t always what they seem.
So who really owns the family business premises? In some ways there is a simple answer – check the Land Registry and the proprietorship register will confirm who owns the legal title to the property. However, a legal owner can hold it on trust for another, and this is especially common in a family business context. The more considered answer to the question is therefore: ‘it depends’. Questions to ask are: Does the business actually own the freehold or do they only rent it? Perhaps the business rents it from its shareholders? From family members or former shareholders? From their pension scheme?
If the business owns the property rather than renting it, typically there are a few different ways of structuring its ownership and each has its own advantages and disadvantages. The most commonly encountered scenarios are set out below.
If the business is not incorporated (e.g. partnership or sole trader), the property is typically owned by the business owner(s). This can also be the case where the business is a limited company, but the property is owned by the shareholders. The advantage to this is the simplicity. The disadvantages are that the individuals’ assets aren’t ring-fenced for the business. Therefore, the tax, divorce and insolvency implications are tied to the individuals’ rather than the business’ circumstances. It is also tricky if there’s a disagreement between owners and a court order might be needed if agreement can’t be reached. This arrangement does offer flexibility though, with ownership in unequal shares possible.
If the business is a limited company, it can be the legal owner of the property. This avoids the difficulties of mixing the individual shareholders’ assets with the business’ assets, means the value of the property is included in that of the business and makes selling the business easier, but if the value of the property is also then vulnerable to the failure of the business and would be available to the business’ creditors in any insolvency situation.
If the business owners’ pension scheme owns the property, typically the business leases the premises from the pension trustees and there are significant tax benefits to be had. However, it does add a layer of paperwork which is unavoidable in order to benefit from them.
Some common drivers for different types of property ownership are:
- Succession planning – once the property is owned by a limited company, shares can be a useful tool for wealth and tax planning rather than the bricks and mortar;
- Financing – if a mortgage is required, it may be more beneficial for the limited company to own the property and secure the loan and be bound to pay the repayments;
- If the property is leasehold, there may be significant onerous obligations on the tenant which the shareholders would rather sit on the company’s balance sheet than their own personal liabilities;
- If a limited company operates multiple divisions which have differently weighted property interests, having a corporate structure with subsidiaries can make more sense; and
- Tax – there are always tax consequences of the different structures and tax advice should be sought at an early stage for anyone considering changing how their business owns its premises.
In conclusion, family businesses should seek advice on the differing options available to them and which structure would suit them best in light of their unique set of circumstances and their future intentions for both their family and their business.