Tax essentials for guest houses and hotels

Published on 21 February 2018

The decision to purchase a guest house or hotel can be a stressful time and understanding your options is crucial to achieving your future aspirations.

We spoke to local experts Armstrong Watson, to find out the key knowledge you need to know if you are buying a guest house or hotel.

The best approach will be dictated by the structure put in place by the vendor, although you should remember that you can control the outcome.

In essence there are two types of purchase:
1. Share purchase
A share purchase is possible when the existing business is already contained within a limited company, with the most distinct advantage being a reduced rate of stamp duty. The purchase of shares attracts 0.5% stamp duty as opposed to stamp duty land tax rates of up to 5%.

It is essential that this option is explored in any purchase if possible, especially given the values of land and buildings associated with these types of business.
The two areas of concern with a share purchase are firstly due diligence and secondly a lack of tax reliefs on purchase.

When buying a limited company, due diligence is imperative to make sure that any financial risks are protected as you are buying the company and the associated history. As you are buying the company, you effectively take control and don’t attract any immediate tax reliefs, a point which can usually be used as a bargaining tool on the purchase price.

The lack of tax reliefs for a buyer when purchasing a company, combined with tax advantages of a share sale for the vendor will always ensure you can open a negotiation.

2. Purchase of trade and assets
This is the most common type of transaction, especially as it applies to all types of existing business entity. As a buyer you will be purchasing the business assets which will sometimes include the property alongside the goodwill of the business.

In this situation the vendor is likely to want to apportion between the asset categories in a way which is the exact opposite of what you as a buyer want to achieve.

As a buyer you should be striving to agree an apportionment as follows:
i. Goodwill – as low as possible as no tax relief is available throughout the business lifecycle, this only acts as a base cost when you sell the business.

ii. Property – as low as possible to reduce the cost of stamp duty land tax and because no tax relief is available throughout the business lifecycle, this only acts as a base cost when you sell the business.

iii. Fixtures, Fittings and Other Assets – These items are likely to attract tax relief in full in the year of purchase and as a consequence a buyer wants these to be as high as possible in the apportionment.

Another consideration to decide how you wish to operate. You can make this purchase
individually as a sole trader, as a collection of individuals through a partnership, through a newly formed limited company, or an existing entity if you already have one.

There are a number of considerations when deciding the type of structure to use, and it is imperative to seek advice from a qualified professional before a decision is made.

The structure will also dictate your annual compliance needs with defined deadlines and requirements for each structure. Partnerships and sole traders are governed by HM Revenue & Customs under Self Assessment, with limited companies dealt with under the Corporation tax regime.

As a director of a limited company you will also be governed under Self Assessment with an annual need for a personal Tax Return.

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