Landlords cut deals with charities to reduce tax bills

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Landlords with empty premises have been exploiting a tax break intended for charities to avoid paying business rates. There are signs this loophole may be tightened.

Landlords with empty premises are exploiting a tax break intended for charities to avoid paying business rates. Many high streets with empty stores and boarded-up properties are therefore witnessing an increase in the number of charities which are popping up all over the high streets.

As charities normally pay significantly lower business rates (20 per cent), landlords are choosing charities as their new tenants in order to pay less tax on those properties.

Current legislation forces landlords to pay business rates on properties that are empty. Charities, however, receive an 80 per cent tax exemption. Landlords who have empty properties therefore have an attractive alternative to keeping their properties empty.

Once a landlord’s building has been occupied for a minimum of six weeks, landlords can claim relief from tax for a period of between three to six months.

The tax relief will be tightened later this year as smaller properties owned by landlords may no longer be able to qualify as properties capable of receiving those reduced business rates. In the past this had been buildings which have a rough rental value of under £18,000.

While there are other ways of landlords lowering their tax bills, renting to a charity is quite a low-risk strategy, particularly if a landlord cannot find anyone else to occupy a property. Rather than leaving the property standing empty, having a charity occupy the premises will mean that a landlord will pay reduced business rates. There are instances where landlords are so keen to get charities as tenants, they not only pay business rates on a charities behalf, but also throw in a donation to the charity.

A number of local authorities are taking the view that businesses are exploiting this loophole to avoid paying rates and have begun challenging cases in the courts. A High Court judge has ruled that local authorities are allowed to consider the extent of a charity’s charitable use of a private landlord’s empty building before deciding whether to grant mandatory rate relief. This could have implications for the growing practice of landlords trying to fill their empty properties by "renting" to charities in return for donations.

How can we help?

If you would like to discuss the above article further, please contact Mark Cole on 0121 456 8296 or mark.cole@mills-reeve.com.

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