Buying property via our company; non-residents refused a mortgage personally

Hi all,

I have read through the many posts on why you should not buy residential properties through a profitable limited company:

However I ask you to consider the following scenario and offer your words of experience and advice:

we have a profitable limited company running for the last couple of years and are thankfully in a position to have a healthy cash balance at the year end

We have just went sale agreed on a group of 4 properties (residential buy to let) at a significant market discount due to the fact sellers needed quick sales coupled with another being a bank ridding one of them of its books.

The cost of the 4 properties has totalled €149,999

We are mortage free on our own home at this time thankfully.

However we have been turned down for a mortage despite a strong savings record and offer to put a hold on our accounts up / freeze the amount we will borrow until the mortage is paid off.

The company is less than 3 years old was the reason for this- whilst the bank were really apologetic and understand we have enough to buy them, the reason for us doing so was to offset mortage relief.

Anyway- the only really different point here I will add is:

As I am 32 and my partner is 28, we have sought professional advice and have been advised to form a holding company and buy the properties through the company and then move them into the holding company immediately.

As most of our business is done overseas, it is very feasible for us to be out of the country for 6+ months at a time- we had chosen to locate to Ireland as a lower cost of set up for us etc

As a non resident for 3 years, we are legally able to avoid CGT on the disposal of the properties / or the company being liquidated and we would expect to do this when I am 40 or thereabouts.

There is also the CGT exemption we could take advantage of now from buying up until end of 2014.

We have done the figures including rental, expenditure, usc, landlord/letting reg charges and insurance etc and still come out with a yield of 5% after everything....this is based on the lowest rent i could possible allow and 11 months rental per annum. (used the tables on the previous threads)

Compared to the bank where we currently lose money on deposit...

I know this is a very similar argument to other peoples scenarios posted but I hope with the twist of the long term plan of 8 years time everything being liquidated will encourage some interesting responses from someone some more experienced than ourselves!

Thank you and i look forward to hearing your responses

Tonster01

With the CGT exemption the double CGT charge does not apply.

If you purchase property in the company it will be exempt from CGT if held for 7 years.

The sale of shares will be subject to CGT if the value is derived from property in the state irrespective of the residence of the disposer.

Rent will be subject to 25% CT plus 15% close company surcharge. Is your company subject to the professional services surcharge.

Have you had any issues with travel expenses.

Thanks Joe90 for the feedback

No- no issues with travel expenses that we have been made aware of.

We were on a large number of business trips last year.

What sort if issues were you referring to Joe90?

The 25+15% surcharge- is this inclusive of USC and paye etc or is it the case then that this is then on top making it an additional day 7+4% potentially in taxes?

Thanks in advance

T

I don't know if the combination of circumstances - "significant market discount"; non-resident, etc makes this an exception to the rule. I think you are getting into very messy territory.

I suggest the following alternatives
1) Approach a different lender, or maybe even a family member for the mortgage instead
2) Take the cash out of the company and buy one or two of the properties instead of all 4.
3) Would the lender lend you enough money to buy one or two?
4) Buy the 4 properties through the company at "significant market discount" and then sell them on immediately and make profits in the company. You might even be able to sell them to yourself before the end of the year.

But overall, if you wish to invest in property, wait until you have the cash or until you can get a mortgage. I know that this means passing up on "significant market discount", but "significant market discounts" come up from time to time.

The 7 year CGT exemption is illusory, as you will pay CGT on the increased value of the company.

Hi Brendan

Thanks for your input.

To go through your points-

1- I have thought about and spoke to a different lender- the same applied the company was under 3 years old and it would be "difficult" to borrow despite funds
I have a long term relationship with my current bank due to a previous business endeveaor also. I thought this would play in my favour.

Also now that I am sale agreed in all 4 deals/ the timing of waiting for mortages etc may kill the deal- granted I could buy and remortage at a later date.

2- taking the money out of the company I would imagine would cost me significantly in tax?
This is indeed an option but I guess I need to address this point with our accountant and see what his stance is in terms I how much I would be taxed on this avenue... Any rough ideas??

3- No the lender will not even lend to us on one of them- again we offered a 45k hold on funds for this but "unfortunately" was not possible.
Banks and umbrellas in good days come to mind.

4- again an option but to be honest, we were looking at this property play of building up a long term stream of residual income.
All things going well with the business we would buy 3-5 more again next year as opposed to investing in additional head count and this way we have residual rental income in the Hirt to med term as well as play the capital growth side in the long term.

Finally tapping family members for the cash personally is an option but it only raises about 60k-100k- and more likely the former- is there any tax implications that I need to consider for borrowing such an amount of money from family?

Perhaps I should do this and buy one of the properties though the company to reduce tax
The rest through personal/family borrowing and try and take the money to repay them out of the company over time.?

Thanks a lot for your insights and invaluable advice.

Regards

T

You really need to go back to first principles here and understand the interplay of income tax can Corporation Tax.

Tax planning: take salary or leave profits in company?

2- taking the money out of the company I would imagine would cost me significantly in tax?

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At some stage you must take the money out of the company. Take it out now before it becomes a total nightmare. If you had taken it out as salary in the year you made the profits, you would now be able to buy these properties in your own name.

As the company is only three years old, then you can probably take a lot of it out without double taxation.

If you have a company which is generating very significant profits, that may well be a better avenue for your time than effort than dealing with tenants.

In short, take the money out of the company as quickly as possible.
As you are non-resident, you should be able to invest it tax efficiently and not have it subject to the Irish tax regime.
As you are non-resident, I imagine that a passive investment in shares is much more suitable than an active business like letting property.

Brendan

"At some stage you must take the money out of the company. Take it out now before it becomes a total nightmare. "

What do you mean by this Brendan can I ask- my priority has always been to build as much cash as possible into the business and develop a cash rich business in order to take advantage of such opportunities.

This may come from my early reading and implementation of advice (wrongly or rightly) from the rich dad poor dad series by always operating in a company to save yourself taxes etc

I know it all must be relevant to the country you operate in and his advice is very US centric.


If you have a company which is generating very significant profits, that may well be a better avenue for your time than effort than dealing with tenants.
This is indeed true but a major factor here for us is that whilst its profitable its also seasonal and volatile- hence again the motivation for an element of residual/guaranteed income regardless of our business cycles.

But i do agree with you also in fairness- it is indeed and always should be our focus point- the good thing for us is the flexibility we have with our business and time etc- issues from tenants should not be a major burden ...
I hear the sighs at my lack of realistic thoughts on this one ...Do not worry, i know it will not be all plain sailing but then what is....


To clarify- I am actually still resident and will be within 10 mins of the 4 properties we purchase, both whilst at home and at work.

However, the professional advice we were given was that say in 8 years time, we would go non resident for a period of 2-3 years as we spend most of our time on business trips anyway, then we would liquidate the company and generate the revenues from it legally tax free.

This would of course mean liquidating our property interests etc also at this time.

Thank you once again for your help, interest and insights.

Kind regards

T

One quick question for everyone if I may?

Can i borrow tax free from family members to purchase the properties?

Thanks in advance

T

tonster01 said:

This may come from my early reading and implementation of advice (wrongly or rightly) from the rich dad poor dad series by always operating in a company to save yourself taxes etc

I know it all must be relevant to the country you operate in and his advice is very US centric.

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That has no application in Ireland and is completely wrong advice for Ireland. Read the Key Post I linked to and a few other Key Posts on askaboutmoney.

What strategy did your tax advisor advise?

This is indeed true but a major factor here for us is that whilst its profitable its also seasonal and volatile- hence again the motivation for an element of residual/guaranteed income regardless of our business cycles.

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It strikes me that the bank was quite right to refuse you a mortgage.

You should not be borrowing to invest if your income is not very sustainable. It is extremely risky.

However, the professional advice we were given was that say in 8 years time, we would go non resident for a period of 2-3 years as we spend most of our time on business trips anyway, then we would liquidate the company and generate the revenues from it legally tax free.

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That seems to be at odds with Joe 90's advice:

The sale of shares will be subject to CGT if the value is derived from property in the state irrespective of the residence of the disposer.

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I don't know enough about it, but Joe sounds right.

It's so much simpler to take the money out and buy the properties you can afford for cash. If you have to borrow, then don't buy them.

tonster01 said:

Can i borrow tax free from family members to purchase the properties?



T

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You seem to have devised a complex strategy from a mixture of Rich Dad, Poor Dad , an advisor and askaboutmoney.

Your tax advisor should know all of this and should do a report for you specifying what they are advising and why.

In general, if you borrow from your family, and pay, say 2% interest, there should be no tax consequences for you. They would have to pay tax on the interest received. If they lend it to you interest free, 2% if €150,000 would be €3,000 so well below any liability for Capital Acquisitions Tax.

You have a company which is generating cash. It's ok to borrow short term and pay back the loans quickly from the cash you are generating.

You should be asking your accountant these questions.

Are you currently resident in Ireland?

International tax is complicated at the best of times and to add in Irish exemptions from CGT and claims of non residence for CGT purposes throws up questions about the taxation of gains in the foreign jurisdiction. It was also seems to be a little contradictory that you are saying the company is based and managed in Ireland for CT purposes by you are non resident for tax purposes.

To answer you most recent question the free use of money is a gift equivalent to the amount of interest that the lender could get by placing the money on deposit