39 - 1m+ Cash - Advice on house purchase and Pension

D

David10432

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3
Personal details

Age: 39
Spouse’s/Partner's age: 40

Number and age of children: 2 children - newborn and 1 year old


Income and expenditure
Annual gross income from employment or profession: 50k from rental properties + 20k salary from two businesses

Annual gross income of spouse: 50k from rental properties

Monthly take-home pay : 7k

Type of employment: Own / operate 2 businesses, Own 2x rental properties

In general are you:
(a) spending more than you earn, or
(b) saving?

Saving around 2k a month from rental property income + salary. Also building up retained earnings within the companies.


Summary of Assets and Liabilities

Renting - 2k a month - do not own a home
Cash of €600k in high-interest bank (Created and sold a business a number of years ago)

2x Rental Properties worth €1,000,000 (no debt / mortgage) - both properties located in Cork (RPZ)
2x Companies :
1) SPV with guesthouse worth €1,000,000 that generates roughly €150,000 trading profit a year - 650k of retained earnings including this years profits - Directors Loan of 800k owed to us (no debt / mortgage)
1) New Business - roughly €200,000 trading profit this year - Not distributed (Yearly profit will be unpredictable and is not guaranteed long term)

No pension.
Do not own any public shares / etfs.


Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month? Yes

8 year old car paid in cash



Other savings and investments:

Do you have a pension scheme? no

Do you own any investment or other property? yes - 2 rental properties and guesthouse


Other information which might be relevant

Life insurance: none


What specific question do you have or what issues are of concern to you?

We are in a very fortunate position that we worked very hard for.

Income
- 120k yearly personal income from 2 rental properties and 2 businesses

Assets
- 600k cash
- 800k directors loan (650k available to be paid out now from retained earnings)
- 200k trading profit this year from our new business (unpredictable)
- 2 rental properties worth 1m and SPV worth 1m



We do not have a family home or a pension. We do not come from wealthy families.

We have modest lifestyles and currently are comfortable living off the income generated from the 2x rental properties.

We are aware that 2 young children will increase our expenses. (No childcare expense - spouse minds the kids).

We are looking at the option of purchasing a family home and setting up a pension.


3 options we are looking at :

1) Buy Semi D House - 500k - probably not a forever home (would probably trade up in 3-5 years) and put this years company profits 350k into Director pension PRSA, put the remaining 600k into high interest saving account (Wise 3.3%) or ETFs

2) Buy the Dream Forever Home - 1.25m, put 200k into Director pension PRSA

or

3) Keep renting, put 350k into Director pension PRSA and put 1.1m in high interest savings (Wise 3.3%),


Going forward put any profits from our businesses into Director pension PRSA


I suppose we are unsure what to do - is it reckless to purchase the forever home now?
 
David10432 said:
Also building up retained earnings within the companies.
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David10432 said:
650k of retained earnings including this years profits - Directors Loan of 800k owed to us (no debt / mortgage)
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I don't like the sound of this.

Are you saying that you used a company to buy a guesthouse?
If so, why?

It usually makes very little sense to buy a property through a company.
You will be hit with CGT twice - once when the property is sold within the company and again when you liquidate the company.

Did you get a detailed written tax plan from a tax consultant explaining this strategy?

If not, you need to get very good tax advice as it might make sense to liquidate the company now and take the tax hit before it gets very big.

Brendan
 
Buy the forever home now.

You can use it as part of your pension planning (downsize potential) and an inheritance for your children

For the other questions - there are more experienced people than me here
 
David10432 said:
1) Buy Semi D House - 500k - probably not a forever home (would probably trade up in 3-5 years) and put this years company profits 350k into Director pension PRSA, put the remaining 600k into high interest saving account (Wise 3.3%) or ETFs

2) Buy the Dream Forever Home - 1.25m, put 200k into Director pension PRSA
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The way you frame your choices is very extreme. I don't think you should buy a semi-D knowing that you will move again in a relatively short term and considering you have the wealth and income to spend more.

I also don't think you should be spending €1.25m if you are Cork based. A quick browse of Daft shows some well located but honestly terrible properties at that price point. Some have clearly been family homes for generations and need major renovation or landscaping so your budget would have to include this work too. And that could be a bottomless pit

Why not consider something in the €750k - €1.1m range. There are plenty of new builds or recently built properties in this price range that would be ready to walk into from day 1. Buying like this would mean that you are more likely to move to an area with younger families like your own and as well as the comfort and lower running costs of newer properties. You should comfortably be able to get a 5 bed detached in that price range to tick all your boxes
 
Hi Brendan,

Thanks for the advice on buying the home.

--

The guesthouse was purchased within a company - to allow us to build up retained earnings quickly with the 12.5% corp tax rate on trading income and repay our director loan of 800k quickly - which has worked out quite well.

Recouping the amount paid for the property quickly - reduces our opportunity cost of having our cash tied up in the guesthouse.

Purchasing within the company also gave us some liability protection for the trading guesthouse.

The property is in a prime location and we don't plan on selling in the foreseeable future ( but plans will probably change as they always do :) )

If we were to sell it - we would try and sell the company itself (any retained earnings would be transferred to our holding company prior to the sale). Proceeds of the sale would be transferred to holding company.

If it would be hard to sell the company shares - the company could sell the guesthouse and transfer the remaining funds to our holding company or into Director pension PRSA.

Thanks
 
Brendan Burgess said:
@David10432

Is that your own tax plan, or has a tax consultant written all that down for you?

Brendan
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Why would a tax consultant formulate such a plan for anyone, Brendan? Their role is to advise on the tax implications of a proposed or actual investment option. The decision is solely a matter for the individual whom they're advising.
 
Hi Tommy

I would expect that a client would go to a tax advisor and say
"I want to start a guest house business. What are the options? Should I set up a company to buy it? "

And I would expect the tax consultant to write out a plan setting out the pros and cons of each option, with a recommendation.

Or if the client is himself very clued in that the client would write out the plan and ask a tax specialist to review it.

Brendan
 
Hi Brendan, that's not really how it works. People acquaint themselves via advice of the tax pros and cons of each possible permutation, and then make their decision taking that into account in the light of their wider circumstances and preferences.

It's perfectly rational to structure the highly leveraged acquisition of a valuable business asset within a company, even if it means that the beneficial owner may in the long term face a cumulatively higher tax burden

It's a lot less risky for the company to repay a mortgage from profits taxed at 12.5% than it is for the owner to do so from rents taxed at c.52% and derived from the same profits.

The other variable is that variations in tax rates and policies can play havoc with such plans. I know of cases where businesses went under in the post-2099 slump because the imposition of USC and PRSI on rental income meant that the owners suddenly went from paying a 40% tax burden on rents charged to their own companies to finance repayments, to a burden of 52% tax. Nobody in say 2005 or 2006 or even later, could have reasonably expected that.
 
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T McGibney said:
Hi Brendan, that's not really how it works. People acquaint themselves via advice of the tax pros and cons of each possible permutation, and then make their decision taking that into account in the light of their wider circumstances and preferences.
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Hi Tommy

Well it's certainly the way I have seen it done and the way I would recommend it to people.

I have also seen accountants simply producing accounts and tax computations without alerting their clients to good tax planning.

But I suppose different advisors have different approaches.

I certainly would not make a large investment via a company without a written plan prepared by or approved by a tax advisor.

Brendan
 
Hi Brendan
Brendan Burgess said:
I have also seen accountants simply producing accounts and tax computations without alerting their clients to good tax planning.
Click to expand...
If you're hired and paid to clean the windows on a house, do you start also painting the walls if they're grubby?
Brendan Burgess said:
Well it's certainly the way I have seen it done and the way I would recommend it to people..

But I suppose different advisors have different approaches.

I certainly would not make a large investment via a company without a written plan prepared by or approved by a tax advisor.
Click to expand...
Maybe it's just that our experiences are different. I've found over the past 25 years that the range of situations where SME owners will pay for detailed written tax advice on matters like this is very very narrow.
 
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