Pros and cons of charging your company rent

Income and corporation tax savings

Although dividends are generally the most tax-efficient way to extract income from a company, if you personally own its trading premises, receiving rent can save more tax. Your company gets corporation tax (CT) relief for the rent you charge which it doesn’t for paying dividends; this in turn leaves more to distribute to you as a shareholder. The downside is that, unlike dividends, rent can affect other taxes, namely capital gains tax (CGT) if you sell the property.

Example. Paul, a higher rate taxpayer, owns the retail unit from which his company, Acom Ltd, trades. It pays Paul rent of £2,000 per month (the full market rate). After CT relief the annual cost of the rent to Acom is £18,000 (£24,000 less 25% CT relief). After tax Paul nets £14,400 (£24,000 - 40%). If Paul took a dividend of the same amount the net cost to Acom for paying it would be £24,000. After tax at 33.75% Paul would be left with £15,900. By paying rent instead of a dividend Acom is £6,000 better off but Paul is £1,500 (£15,900 - £14,400) worse off.

Overall financial advantage

Overall, Paul and Acom save tax of £4,500 by taking the rent option. The tax saving is initially all in the company. If Paul wants to get his hands on it he’ll have to pay income tax that will reduce the overall financial advantage. Using the figures from our example, if Acom paid the £6,000 CT saved to Paul, he would net £3,975 after income tax. Rent still wins over a dividend. Rather than take the extra £6,000 and pay tax on it, Paul could allow it to accumulate tax free in Acom indefinitely.

Reduced CGT relief

While receiving rent instead of dividends seems at first sight like a no-brainer there’s another factor to take into account. The rent adversely affects the amount of CGT business asset disposal relief (BADR) Paul would be entitled to if he ever sells the property in connection with the sale of his shares in Acom. His BADR would be proportionately reduced for the period for which he charged Acom rent. The amount of rent can also be a factor when calculating BADR.

Example. In March 2024 Paul sells all his shares in Acom and the property he rented to it. He makes a capital gain of £100,000 on the property. Assuming he has no capital losses to reduce the gain he’ll pay CGT of £18,800 (£100,000 - £6,000 exemption x 20%). If Paul had not charged rent the gain would have qualified for BADR and Paul would have paid CGT at 10% instead of 20%, so charging rent has cost him an extra £9,400 in CGT. Note that the loss of BADR would be proportionately less if Paul had charged Acom rent at less than the full market rate.

The big picture

In our example, Paul would only have needed to charge Acom rent for just over two years for his income tax saving to have exceeded the extra CGT he would incur as a result. In practice, determining if it’s more tax efficient to charge rent or benefit from BADR involves many factors and guesswork but it’s always worth the effort