company Vs partnership Vs other for property development

R

rfpj

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Hello,
would like to hear from anyone with useful information as to how best my brother-in-law and myself might proceed with a business idea we've been mulling over...

He is about to be made redundant in coming months, and we've thinking about going into 'business' together in the line of buying, renovating and selling on houses/apartments. For now we think buy-to-sell rather than buy-to-let. We both already have a couple of houses each with tenants etc but don't want to go further on that line but instead concentrate on finding and working on a particular house for X weeks/months.

How should we organise ourselves ...
* to present ourselves to Banks for suitable loans, particularly for the 1st loans to get going. Do the banks typically get involved with something like an interest free loan for X months, with some of that to buy the house and part of it to do it up.
* to present ourselves in a tax favourable light to the Revenue Commissioners
* Brother-in-law would work full time on the renovations, whereas i would still hold my current busy day job, but get involved where I can - particularly on the buying/selling/subcontracting where appropriate. We'd imagine he would draw a salary of some description, not necessarily a very large one but certainly something would be needed to keep him in style until such time as we would finish the house.

I presume a partnership of some description, rather than say one of us formally employing the other in a company - i'd probably have better access to money - but how formal would be needed. If at all ? I assume others are doing similar already - what are the lessons and good experiences you've gained.

Any advice or "warnings" in this regard more than welcomed .. thanks in advance

rfpj
 
First of all, you must ask yourself if this is a viable business. Personally, I doubt it is. The transaction costs in Ireland are so high, that they will eat into most of your profit. Stamp duty of up to 9%, legal fees on purchase and sale and auctioneers' fees on the sale.

In the examples I saw on programmes on TV such as property ladder, the profit was made simply because the properties went up in value. If they had bought the house and done nothing except sell it 6 months later, they would have made the same profit. In England, the stamp duty is much lower - usually around 1% I think. And you can do your own conveyancing in many cases.

In calculating your profits, you must factor in the salary which your brother in law is giving up and any time which you put into it.

There is a serious risk that house prices may fall during your period of ownership. You must make a comfortable enough profit to compensate for this risk.

Do not use a company for property development. The tax disadvantages are very high.

You will have to try to structure it in a way that the profits will be subject to Capital Gains Tax. But I think the Revenue will regard you as trading, so you will be subject to Income Tax.

You should do a separate partnership agreement for each property you develop. The banks will lend to you if you have security. If you don't have plenty of cash to pay for unexpected problems, I don't think you should do it.

brendan
 
Mmmmm
thanks for this Brendan .. you have raised some issues that I hadn't really thought through. I need to go back to the drawing board .

Thanks again - your two minutes have done wonders to my plan !! ... but better now than in 6 months.

rfpj
 
companyvspartnership

You will have to try to structure it in a way that the profits will be subject to Capital Gains Tax. But I think the Revenue will regard you as trading, so you will be subject to Income Tax.


Brendan, do you know what criteria the Revenue use when determining that there is trading. For instance if I buy a site at the rate of one a year/one every 2 years build and sell would that be deemed trading do you think?
 
Re: companyvspartnership

Sorry - I have no first hand experience in the area. The courts have determined a series of "Badges of Trade", but to what extent these are applied, I simply don't know.

Brendan
 
Re: companyvspartnership

Hi M,

To add to Brendan's point there is also case IV property dealing that used to be in the FA (MP) 1968 - not sure of TCA reference - that deals with motive and you might find it very hard to argue that motive was not to trade. The Revenue could invoke these and then you have a profit motive and therefore are trading so no cgt - be very careful.
 
Re: companyvspartnership

I recently helped in the set up of business similar to the lines you are talking

If you want to contact me I would be glad to discuss some scenarios and what is the most efficient system to have in place for you

Stu
[email protected]
 
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