"struggling with my repayments, but I have a company with cash"

[Brendan Burgess]

A solicitor told me that many of her clients are using their companies to buy their personally owned investment properties for cash purposes. I can't see how this is ever the best solution to the problem. Has anyone come across this proposed solution and how does it work?


I bought a property for my business in 2002 for €1m.
I let it to the company for €40,000 a year.
It was interest only, at SVR, for 10 years but since 2010, it is capital and interest and the repayments are €10,000 a month or €120,000 a year.
The market value of the property today is €1,000,000 (unlikely but I can't make this work otherwise)
My company makes €100,000 profit after paying rent but before my salary.
It has accumulated cash of €300,000.

1) The company buys the property from me for €1,000,000.
2) I pay off the loan to the bank.
3) The company uses its €300,000 cash pile and borrows €700,000 over 15 years.
4) The loan repayments are €5,500 per month

The company is now making profits of €140,000 before interest or €100,000 after interest.
After repayments, the company has €74,000 cash with which to pay me my salary, but I have no loan repayments to make.
The company is retaining profits of €26k on which it pays around €3k corporation tax.

I can't see how this solution is of any benefit
If it's a SVR mortgage, then the bank should be happy enough to reschedule the loan, which would make this complex transaction unnecessary.

If it's a tracker mortgage, the bank won't reschedule it, but if I sell the property to the company, the company will take out a mortgage at Standard Variable Rate.

I have used €1m as the purchase price and €1m as the current value, which is very unlikely. It's more likely that the price has fallen to around €500k. If the company buys the property for its current value, I won't be able to pay off the mortgage. I don't think that the company can pay me more than the market price. It might pay me a generous price e.g. €600,000, but it can't pay €1m.

If the company has a lot of cash, it will have much lower borrowings. But if it has a lot of cash, wouldn't it be a lot simpler to pay that cash out to me to allow me to afford my repayments?

This problem may have arisen because the company has accumulated cash instead of paying it out to the shareholder. Using the company to buy the property from me is just making this problem of having assets in a company much worse.

If the company has a big lump of cash, maybe it should be wound up so that I get the cash subject to CGT. Then I can use the net cash to keep up my repayments for a few years.

 

[Joe_90]

Well, if the mortgage is an interest only tracker and the property is worth 1/2 what you paid for it then you are bunched. You are 100% right the market value has to apply.

But consider a property on interest only on variable bought in 2002 that is worth the same as you paid for it. You need to get 120k after tax to make repayments. If the interest rate is the same then in the company you have 87.5% of your income left as an individual you have 48% or 45% to pay back the capital. The gain in the company will also be exempt for 7 years.

It is a reasonable proposal if the circumstances are right.

 

[Brendan Burgess]

The gain in the company will also be exempt for 7 years.

.

That's a key point which I had missed.

If a company buys a property before the end of 2014, it gets the CGT exemption as well. So it keeps it for 7 years and then sells it to the original owner. It still has the problem of the gains being within the company, but the problem is halved now.

 

[Brendan Burgess]

But consider a property on interest only on variable bought in 2002 that is worth the same as you paid for it. .

I think commercial properties purchased in 2002 are worth about half the purchase price today.

If it's worth the same as I paid for it, then I should be able to sell it and repay the loan.

If I am on a SVR of interest, I should be able to stay on interest only or, at least, extend the term. If necessary, I may have to refinance.

If the company buys it, it does make it CGT free within the company for 7 years which is an interesting idea.


I still can't figure out a scenario where I would be better off in the long-term doing this.

OK, the company would have more cash within the company to meet the repayments, but then it has a problem when it goes to sell. The company pays less tax now than the individual, but long-term the tax impact is higher.

 

[Dermot]

Could you do a new lease between yourself and the company and raise the rent and reschedule the mortgage to match repayments.

The idea of selling it to the company needs to be considered also. The company could give you reasonably close to the market price, keep it for 7 years and possibly sell it back to you at market price then.

 

[cremeegg]

Could you do a new lease between yourself and the company and raise the rent and reschedule the mortgage to match repayments.

This seems the obvious and straightforward solution.

As for all the other solutions. Does the Revenue not have the power to ignore a transaction which is undertaken, solely to reduce tax with no commercial logic.

 

[Brendan Burgess]

Does the Revenue not have the power to ignore a transaction which is undertaken, solely to reduce tax with no commercial logic.

This solution increases the tax ultimately.

The purpose of selling it to the company is a commercial decision - a sale by a borrower who can't meet their repayments.

Brendan