Key Post Why you should never use a limited company to invest in residential property

Brendan Burgess

Brendan Burgess

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I am not a tax expert, so corrections welcome. Some of the figures have been deliberately simplified e.g. 50% for personal taxes.

This comes up a lot in various formats so I thought I would update the Key Post on the topic.

This post is about an Irish individual investor who wants to buy residential investment property in Ireland and thinks that they might do it through a company.

This does not cover:
  • Property development
  • A business operating through a company which wants to buy its own premises
  • An existing company which has built up a big cash pile and wants to buy a property
  • Buying a property through a pension fund
  • Buying overseas property
Before reading further, could you please read this opening post again. It is about an individual who is thinking of buying an investment property in Ireland. It never makes sense to do it through a company. All of the objections so far have been about cases which I have specifically excluded.
 
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Summary of reasons not to hold a property in a limited company
  1. You will get less after-tax rent into your hand
  2. You will pay Capital Gains Tax twice - once when the company sells the property and once again when you liquidate the company
  3. It is more difficult to manage a property through a company than individually e.g. dealing with difficult tenants
 
Let's assume you buy a property for €300,000 and you get a rental profit of €20,000.

Taxes on rent

1713945461518.png
People are attracted to companies on the false reasoning that "Corporation Tax is lower than Income Tax".

But the profits after tax are still in the company and will be taxed at Income Tax rates when taken out of the company. So you will end up with less money in your hand.

You can retain the profits in the company, but will pay a further surcharge of 20% on undistributed profits. And at some stage, you will have to get the profits out and pay taxes on them.
 
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Now let's turn to Capital Gains Tax when you dispose of the property.

Let's assume you make a Capital Gain of €100,000

1713946006004.png

But aren't there ways of avoiding paying CGT twice?

Can't I just sell the company and then pay only CGT once?
In theory, you could. But most buyers would not touch a property if owned by a company. They would buy the property from the company but would not buy the company. If they were prepared to buy the company, they would discount the price to allow for the unrealised CGT liability.

Can't I get Retirement Relief or Entrepreneurial Relief when selling the company or dissolving it?
No, these reliefs apply to business assets only.

But won't the capital gains disappear when I die?
If you own the property in your own name when you die, the capital gain will disappear for tax purposes.

The company will not disappear. Your beneficiary will inherit shares in a company and will be stuck with the headache of how to get the property out of the company. The company will pay CGT on the disposal of the property whatever happens.
 
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So are there any advantages in owning a property in a limited company?

There are no tax advantages just big additional tax liabilities.

Some people like owning assets in a limited company because their liability is limited if something goes wrong e.g. a tenant falls down the stairs and breaks their neck. They can sue the company but not the owner of the company. However, you should insure your liability for this whether you own the property through a company or individually.

In theory, you can reduce risk by using the retained profits to pay down the mortgage quicker. Going back to the first example, the company retains profits of €12,000 after tax compared to the €10,000 retained by the individual. This would allow for a quicker paydown of the mortgage. But this would be only a small advantage and would probably be wiped out by the fact that a company would have a higher mortgage rate than an individual.
 
Are there other disadvantages in owning a property through a limited company?

Yes, lots.

You will need to make an annual return to the Companies Office. While this is simple enough, if you miss the deadlines, you will lose your audit exemption, which means you would need an expensive annual audit.

It's tough enough dealing with a bad tenant as an individual, but having a company between the tenant and the owner of the company, would just add an extra layer of complexity in any dealings with the RTB or the courts.
 
Other points

"I am a big fan of Rich Dad, Poor Dad by Robert Kiyosaki and he recommends using a company to buy property"
That is based on the American tax system which is very different from Ireland's.

"My cousin in the UK has built up 10 properties in his company and says that it's more tax-effective for a company to own property"
That may well be the situation in the UK, but the tax regime in Ireland is very different.
 
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There could be a tax angle...you could sell company as going concern or liquidate it to avail of either Entrepreneur Relief or Retirement relief but as you say they should probably get tax advice
 
If you search Askaboutmoney you will find threads "I have a property in an investment company , how do I sort out this mess?"

Here is one

Key Post - Extracting investment properties bought through a company

Can people with tax/accounting/property expertise please comment on the viability and advisability of the following scenario ? Mr & Mrs A own a small business which is a Ltd Co. They are close to retirement age. Throughout their business life they have largely used the business' profits to...
www.askaboutmoney.com
 
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I think there needs to be a series of posting from our posters why you SHOULD use a company - we have all the downsides and not for one moment do I think any of them were irrelevant - the opposite - you cannot go into this blind.

1. You have intentions of multiple properties.
2. Others such as children could be shareholders at start
3. Pension contributions
4. Deductions for company more straight forward than restrictions on individuals.
5. Selling company does not trigger disposals of properties
6. Vehicle could be used for cross border purchases
7. If you did not have PAYE employment - payments from company to you as PAYE will allow you to get the PAYE credit
8. Mileage for proper purposes paid by company can be at civil service rates - actual expense for owner-renter
9. Annual €1000 tax free
10. Limited liability
 
That is a great list. Thanks very much. I will deal with each one in turn.

It would be interesting to come up with a set of very specific circumstances where it made sense.



WizardDr said:
1. You have intentions of multiple properties.
Click to expand...

If it's wrong for one property, it's wrong for multiple properties.

But if there is some advantage in a company to own multiple properties, please let us know.

Brendan
 
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WizardDr said:
2. Others such as children could be shareholders at start
Click to expand...

They could also be joint owners of a property owned outside a company.

The theoretical advantage here is that if a child owns a property, they would probably not qualify for any FTB benefits. Whereas if they owned shares it would not matter.

I really don't see why you would want a child to be an owner of a property.

Brendan
 
5. Selling company does not trigger disposals of properties
Click to expand...

Brendan Burgess said:
Can't I just sell the company and then pay only CGT once?
In theory, you could. But most buyers would not touch a property if owned by a company. They would buy the property from the company but would not buy the company. If they were prepared to buy the company, they would discount the price to allow for the unrealised CGT liability.
Click to expand...
 
WizardDr said:
7. If you did not have PAYE employment - payments from company to you as PAYE will allow you to get the PAYE credit
Click to expand...

I don't think so but I am not sure.

The Employee Tax Credit cannot be claimed by:

  • proprietary directors, their spouse or civil partner on income directly related to that directorship
 
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