Lease or buy

The first question a new business should ask before acquiring premises, is whether a building is needed at all. Can the business be operated from home, or via the internet? Even businesses selling goods directly to customers may now be able to operate entirely online, with stocks held by a third party and deliveries organised remotely. The implications of working from home are discussed in the Trading from home guidance note.

If premises are needed, costs will increase. Acquiring premises also reduces flexibility, as substantial fixed costs are payable whether or not the business is profitable.

Assuming that the implications of these wider business issues have been assessed, and a decision has been made to acquire premises, the choice is broadly between purchasing and leasing.

Whether to purchase or rent premises is a major business decision. For instance, purchasing premises brings security of occupation and the opportunity for capital appreciation, but also the risk that the property might fall in value or that the lender might foreclose on the business. A lease doesn’t have the same opportunities for capital growth, or the same risk, but is more flexible.

The implications of this decision are far wider than the complex tax consequences which are outlined in this note. The whole picture should be considered, and advice taken, before a decision is made. This note outlines the tax consequences.