Purchasing a residential property through a profitable Limited Company

S

snowtime

Registered User
Messages
6
Hello All;

I have seen some posts on this but I am not sure if this particular scenario has been covered. I have put some figures together on this. I am not sure that I have all the bases covered. I would welcome any input regards anything that I have not thought of.I am not an accountant so this is very much a layperson’s reckoning.

It is based on a 35 year old company director purchasing a property and selling it at age 55.

Here goes


Purchased Via a Limited Company

• Profit in Limited Company €91,429
• Less Corporation Tax at 12.5% €11,429
• Profit After Corporation Tax €80,000
• Purchase Price €80,000
• Rent Per Annum €6,000
• Less Corporation Tax at 25% €1,500
• Remainder After Corporation Tax €4,500
• Less Income Tax/PRSI/USC at 53% €2,385
• Yield p.a. €2,115
• Over Life of investment of 20 Years €42,300


Purchased Personally after Personal Tax

• Profit in Limited Company €170,213
• Less Income Tax/PRSI/USC at 53.0% €90,213
• Profit after Tax Less Income Tax/PRSI/USC €80,000
• Purchase Price €80,000
• Rent Per Annum €6,000
• Less Corporation Tax at 0% €0
• Remainder After Corporation Tax €6,000
• Less Income Tax/PRSI/USC at 53% €3,180
• Yield p.a. €2,820
• Over Life of investment in 20 Years €56,400
 

Capital increase on investment of €80,000 after 20 years (Same for Both cases)

• €80,000 increasing at 2% p.a. grows to €118,900 after 20 years (Time of Sale)
• Capital gain= €118,900-€80,000= €38,900

• Less Capital Gains Tax @ 20%= €7,780

• Profit After Capital Gains Tax= €111,120


Wages paid to Director from profit from sale

• Profit After Capital Gains Tax €111,120

• Wages paid to director from profits after Sale €25,429

• Less Income Tax/PRSI/USC at 53% €13,477

• Wages less income Tax €11,951

• At ages 55 director may pay up to 337% of wages into pension fund €85,694

Overall income/profit when purchased via Limited Company

• €42,300 (Rental)+ €11,951 (Post Sale Wages less Tax)+ €85,694 (Pension Fund) = €139,94
• €139,945(Overall Income)-€91,429 (Original investment)= €48,517

Overall income/profit when purchased Privately

• €52,400 (Rental)+ €111,120 (Post Sale Wages less Tax) = €167,520

• €167,520(Overall Income)-€167,520 (Original investment)= -€2,693
 
The only think I know about companies purchasing property is that it is not a good idea. There are threads on here about it, and some of the accountants gave good replies on it.
 
Hi Snowtime

It seems very hard for people to accept that they simply should not buy an investment property through a company. Many accountants, will say "it depends on the personal circumstances" It doesn't. I have yet to see a situation where it makes sense.

It was suggested to me recently that it might make sense for a company which was cash rich to buy a struggling investment property from the director of the company to ease cash flow problems of the director. I asked for the workings but didn't get them. Even then, it was accepted that it was not good tax planning, but seemed to ease some cash-flow problem.

The figures are a bit hard to follow, despite your excellent layout, but it appears that you have made the following errors, any one of which would sink your plan.

1) After 20 years, the €80,000 is still in the company. You can't get it out without paying income tax or CGT on it. So factor that in.

2) The pension argument doesn't hold. Pensions are not a permanent tax deduction. They are a tax deferral. When you draw down your pension, it will be subject to income tax.

3) Anyway, you can't base a tax plan on how the government of the day will be treating pensions in 20 years. It could be a lot less favourable.

4) With annual profits of €100,000 a year, you probably should be contributing the maximum tax efficient amount to your pension now. This probably means, that you will hit the max tax-free lump sum long before 55 and should stop contributing then. (You might even consider buying the property through your pension fund?)

5) • Less Capital Gains Tax @ 20%= €7,780
CGT is now 33% not 20%. I think it's 33% in companies as well.


Overall, it's just so much simpler for a person to own a property.

  • The person deals with the tenant directly. Dealing via a company can be complicated, especially if it goes legal
  • The company remains smaller and is less likely to need an audit.
  • The tax returns are a lot simpler
  • There is probably more scope for CGT and CAT planning if your assets are held personally. For example, if you die while you own the property, there is no CGT on the property. There would be no CGT on the sale of the company on your death either, but there would be CGT within the company.
  • If you ever want to sell the company, you will have to dispose of the property first or the buyer will have to buy a company with a property it doesn't want.
  • If you ever want to give shares to an employee or investor, you will be giving them shares in a company which owns properties.

Keep your personal finances separate from those of your company as much as possible. If the company ever gets into financial trouble, the owner's personal finances are kept separate. If the company owns the property, the property will be available to pay the creditors.
 
Brendan Burgess said:
It seems very hard for people to accept that they simply should not buy an investment property through a company. Many accountants, will say "it depends on the personal circumstances" It doesn't. I have yet to see a situation where it makes sense.
Click to expand...

In my experience, it only makes sense in a very limited range of circumstances where a trading company wishes to acquire their own business premises and will be borrowing heavily to finance it. I have yet to see any scenario where it is sensible for a limited company to purchase a residential property.
 
Can only agree with what others have posted on this thread. Except in exceptional circumstances do not buy a rental residential property through a limited company. It will break your heart the amount of tax you will have to pay, both ongoing and when you decide to sell it and take the money out.

snowtime said:
Purchased Via a Limited Company

• Profit in Limited Company €91,429
• Less Corporation Tax at 12.5% €11,429
• Profit After Corporation Tax €80,000
• Purchase Price €80,000
• Rent Per Annum €6,000
• Less Corporation Tax at 25% €1,500
• Remainder After Corporation Tax €4,500
• Less Income Tax/PRSI/USC at 53% €2,385
• Yield p.a. €2,115
• Over Life of investment of 20 Years €42,300
Click to expand...

The company will also be liable for a Close Company Surcharge (CCS) on the after-tax rental profit. The CCS is calculated as

Rental Profit - €6,000
CT paid - €1,500
After Tax income - €4,500
7.5% Trading Discount - €337.50
Income after Discount - €4,162.50

CCS @ 20% = €832.50

So from a rental profit of €6,000 you will have to pay tax of €2,332.50 which is an effective rate of 38.88%. If you then want to take the balance of €3,667.50 out of the company you will have to pay tax of 52% which is an additional €1,907.10 leaving you with just €1,760.40 from the rent of €6,000 which is an effective tax rate of 70.66%!

The CCS can be avoided by taking a distribution out of the company but TBH this is more hassle than it's worth, especially for such a small sum.
 
Hi Brendan,

Thanks for your reply.

Apologies for the confusing figures.

As you said you have yet to meet a case where it makes good financial planning.

The main idea behind my plan was that it was avoiding tax at over 50%. But on the other side the old adage, 'if it was that easy everyone would be at it' was firmly ringing in my ears as I posted my figures.

However to reply to some of your comments;

• “The person deals with the tenant directly. Dealing via a company can be complicated, especially if it goes legal”

I really don’t see the issue here as estate agents deal as agents with tenants on behalf of landlords. Why not a limited company? Plus the company would potentially have more resources if things go legal. Perhaps I am missing something, but if the whole thing does not stack up financially it is a moot point.

• The company remains smaller and is less likely to need an audit.

I have been audited before this. Inconvenient granted, but that is one of the ‘Joys’ of being self employed. However if this is legal and tax compliant I don’t really see how Revenue could have an issue. Or perhaps I am being naive ?

• “ There is probably more scope for CGT and CAT planning if your assets are held personally. For example, if you die while you own the property, there is no CGT on the property. There would be no CGT on the sale of the company on your death either, but there would be CGT within the company.”

Not something I had considered, and I would most likely be past caring at that stage:). But you are right; why leave an additional ‘mess’ for those behind me.

• “If you ever want to sell the company, you will have to dispose of the property first or the buyer will have to buy a company with a property it doesn't want.”

True. But I am not likely to be selling. The business it not the sort of business that could be sold. Anyway my intension would be wind down this business as I got older and start a new one if required.

• “If you ever want to give shares to an employee or investor, you will be giving them shares in a company which owns properties”.

Not likely to happen, but worth noting.

Despite all of the above if it does not stack up financially that is the end of things as far as I am concerned. It is also a snapshot in time, and who knows how Revenue will treat this in 20 years.
The other point you made was considering purchasing through a pension fund. This was my first consideration, but no financial institution seems to be offering this option any more. Are you or any of the other posters aware of any institutions at the moment who are?

Thanks Again,

Snowtime
 
Hi DB74,

Thanks for pointing those pitfalls out.

The other interesting thing you mentioned is taking a distribution out of the company to avoid the CCS. You are right it definitely is not worth it for such a small sum.
However I have heard of distribution profits before; but no one has been able to tell me exactly what it is and how it works. Can you give me brief description ?

Thanks,
Snowtime.
 
Snow time,

In order to discourage people from buying property in companies there is the Close Company Surcharge. This is a 20% surcharge that applies to investment income of close companies (companies owned by 5 or fewer people).

The investment income is subject to 25% Corporation Tax first. Then there is a trading discount of 7.5% and the undistributed investment income (after tax investment income) is subject to a 20% surcharge.

Hope that helps.
 
DB74 said:
Can only agree with what others have posted on this thread. Except in exceptional circumstances do not buy a rental residential property through a limited company. It will break your heart the amount of tax you will have to pay, both ongoing and when you decide to sell it and take the money out.



The company will also be liable for a Close Company Surcharge (CCS) on the after-tax rental profit. The CCS is calculated as

Rental Profit - €6,000
CT paid - €1,500
After Tax income - €4,500
7.5% Trading Discount - €337.50
Income after Discount - €4,162.50

CCS @ 20% = €832.50

So from a rental profit of €6,000 you will have to pay tax of €2,332.50 which is an effective rate of 38.88%. If you then want to take the balance of €3,667.50 out of the company you will have to pay tax of 52% which is an additional €1,907.10 leaving you with just €1,760.40 from the rent of €6,000 which is an effective tax rate of 70.66%!

The CCS can be avoided by taking a distribution out of the company but TBH this is more hassle than it's worth, especially for such a small sum.
Click to expand...

Would it not be a dividend of 33% tax.

Fundamentally the issue I see here is that in order to invest 80000 in a property as an individual you would need to extract a gross of 119700 from the company (first pay 12.5% corp tax. then withdraw 106400 as a dividend and pay 33% to get 80000 into the hand)

If your company is on track to make 120000 profit during the year could you not buy the house during the year and then pay 12.5% only on the remaining 40000?

For me its a cash flow thing I can't get my head around, the company can buy a lot of house today but the individual will have a lot less to play with once the taxes are paid.

Edit - in your workings you show CT paid @ 25%, should it not be 12.5%.
 
chillaxed said:
Would it not be a dividend of 33% tax.

Edit - in your workings you show CT paid @ 25%, should it not be 12.5%.
Click to expand...

A dividend from a company is subject to marginal rate income tax, PRSI and USC, at that level 52%, perhaps 55%.

Rental income in a company is subject to 25% Corporation Tax (12.50% only applies to trading income) and also an effective 15% close company surcharge or almost 40% Corporation Tax.
 
It only makes sense having property in a company when you are borrowing to finance it.

Otherwise, apart from the CT and income tax problems noted above, you will be taxed very highly when selling it - CGT on selling the property and CGT on liquidating the company / income tax to take the funds out.

It just does not make sense purchasing it in a company.
 
You could consider setting up a group structure and buy it in another subsidiary.

You can move funds through a 90% group structure (conditions apply) without any tax problems.

Any excess funds can be funnelled back up to the parent company for reinvestment while leaving just the property in the subsidiary.

That way you ringfence any risk to just that company.
 
Thanks for the inputs, great information from all, I was under the impression that a dividend is taxed at 33%, as you are already paying tax and PRSI on a salary from the company.

One thing is becoming clear, not matter what route one takes they are confronted by penal tax rates along the way.

Is there an avenue for a company to loan cash to the director to buy the property in his own name?

Or what about a company buying a run down property cheap and then spending money renovating it, is this a better option?
 
Paddy199 said:
It only makes sense having property in a company when you are borrowing to finance it.

.
Click to expand...

T McGibney said:
In my experience, it only makes sense in a very limited range of circumstances where a trading company wishes to acquire their own business premises and will be borrowing heavily to finance it.
Click to expand...

1) It never makes sense for a company to buy a property as an investment - end of story.

2) It may make sense for a trading company to acquire their own business premises. For example, if you have a wholesale company, you may consider retaining profits in the company to buy your own warehouse.

While it may make sense for a trading company to acquire its own premises, in most cases, it will probably be more tax efficient and it will probably make more business sense for the shareholders to buy the property in their own names and let it to the company.

Anyone fancy writing a Key Post "Should we buy our business premises through the company or in our own names?"
 
You must log in or register to reply here.
Back
Top