Studios, pensions and tax

Buying your own studio is the dream of many artists – Kay Linnell and Nick Wilson from Accounts Action Ltd explains how to do so in the most tax-efficient way.

The most tax efficient way of buying a studio depends on:

  1. The nature of your business
  2. How the studio is going to be used
  3. When you intend to sell it

If you are employed

Generally, employees cannot obtain tax relief for the purchase costs, running expenses or taxable gains on the disposal of business premises, although some reliefs are available to Company Directors. Even employees can obtain some reliefs if they purchase premises using a Self Invested Personal Pension Plan (SIPP), which is covered below.

If you are self employed

If you are self-employed, the simplest option tax is to use part of your home as a studio.

The advantages are

  • It is a simple arrangement
  • A proportion of household expenses are deductible from profits – usually based on the proportion of the property used for business ( the number of rooms used for business as a proportion of the total number of rooms, excluding kitchen and bathroom).
  • If the property is gifted, sold for less than market value when the business ceases, or forms part of a taxpayer’s estate when they die, then the business proportion can qualify for relief from Inheritance Tax subject to various conditions.

However disadvantages include

  • Part of any capital gain on the sale of the property will be taxable, based broadly the same proportion of business use claimed in their trading accounts. Some reliefs are available, and if the business use ceases before the property is sold then the taxable proportion of any gain will reduce over time.

If an artist buys a property exclusively used for their business, they cannot claim relief for the purchase costs in their annual trading accounts. Annual running costs will be tax deductible, including interest on any loans taken out to purchase the premises, but not capital repayments. Once again, if the property is gifted on the cessation of business or forms part of an individual’s estate then the disposal can qualify for relief from Inheritance Tax. In addition, any gain on the sale of the premises can qualify for Entrepreneurs Relief (ER), if the sale takes place within three years of the business ceasing, subject to conditions. ER will restrict the tax due on premises used exclusively in the owner’s business. An individual can rent the premises after they cease to trade in it, but if it is not sold within 3 years then any gain on sale will be fully taxable, subject to the annual Capital Gains exemption.

If you have a Limited Company

An artist trading via a limited company can also buy the premises personally for the use of their company for trade. Under these circumstances they can claim relief for annual running expenses but any rent that they charge to the company will be taxable. If the property is sold as part of the sale of the company, then any gain on the property can qualify for Entrepreneurs Relief. However, if a full market rent is charged then HMRC may argue that the property is owned as an investment, in which case it will not be eligible for Entrepreneurs Relief or Business Inheritance Tax Relief.

A Limited Company can purchase a studio to use as business premises, using a loan if necessary. The company can deduct the annual running costs from its taxable profits, but any gain on sale will be fully taxable at the company’s annual tax rate. However if the director of the company sells their entire shareholding (in other words, their entire interest in the business and all of the assets that it owns), any gain relating to the studio may qualify for Entrepreneurs Relief.

Can a studio be your retirement pension?

Business premises can be bought by, or transferred into a Self Invested Personal Pension Plan (SIPP) or company pension scheme. The advantages of holding property within a pension scheme are that the business (whether a self employment or limited company) can claim tax relief on rental payments (at no higher than the market rent) to the pension scheme.

The pension scheme can borrow money from the existing fund to purchase the property, and will pay no tax on any rental profits, nor any tax if the property is sold at a gain. There are additional advantages in this method, since the pension scheme is protected if the business goes into liquidation, on retirement the property can be sold and the funds within the scheme can be used to purchase an annuity, the pension scheme can continue to rent the property to another business exempt of tax, the pension beneficiary can receive payments from the scheme without winding it up (called Pension Drawdown), and if the beneficiary dies before drawing a pension then the scheme can be passed to their heirs. There are tax implications if an individual or company transfers assets used in their business to a pension scheme, and they should seek professional advice before doing so.
Any artist planning to buy their own studio should at the very least discuss their plans with an Accountant, and a Financial Advisor if they wish to do so using a pension scheme.

Accounts Action Ltd is an Accountancy practice that specialises in helping Artists, Writers, Actors, Performers and Entertainers with their accounts and tax returns. It also works with  Financial Planners who can advise on arranging  pensions, investments in property, share portfolios and annuities.

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