Key Post Extracting investment properties bought through a company

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trajan

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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 acquire houses that they then let out. Now they are retiring they want to separate the business operations from the properties aquired.

The houses (numbering 12) are valued by an MIAVI and they all tot up to around €3 million. The business (including the property of its premises) is estimated at around €1 million.

The proposed transfer of the purchased houses from the business into the private ownership of Mr & Mrs A is to be done via reducing the creditor column of the business' Capital A/C by around €4.5 million - the value of the properties plus associated transfer charges and duties. The CGT on this transaction is to then be paid through a separate increase to the business' Capital A/C by Mr & Mrs A.

Due to the scale of things, it will clearly be necessary for Mr & Mrs A to immediately sell some of the houses in order to meet the substantial CGT demand on their business' property transaction. This in turn means that they as individuals will come to be liable to CGT on the latter properties' sale. However, as the properties were transferred at or near a market valuation close to their sale price, this should be minimal.

In short, Mr & Mrs A have used their Ltd Co business' structure (and associated lower corporation tax rates) to acquire a good number of houses and have effectively paid CGT once (as they should) when taking these properties back into their personal possession on retirement.
 
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What is your question?

If this relates to a real situation, the people in question need robust tax advice.

The accounting treatment of the proposed transactions is neither here nor there.
 
Hi trajan

Agree that they robust tax advice and I suggest that they get it from whichever tax advisor advised them to use the accumulated profits to buy houses in the company.

Brendan
 
@T McGibney and @BB :

It's the road seldom taken, I accept - usually because of the road's end.

But regardless of how the business owners got there, is the path towards separating the houses from the business viable as described ?
 
I don't really follow your accounting proposal, but it's tax you need to worry about.

I am not a tax expert but this is my understanding.

Winding up the company seems to be the best idea.
The company will have a CGT liability for the gains on the assets it distributes - say €500k.
It will then distribute €3.5m to Mr. & Mrs A who would pay CGT on the distribution - say €1m.

They will presumably get some Retirement Relief on the business assets but not on the investments.

Brendan
 
trajan said:
@T McGibney and @BB :

It's the road seldom taken, I accept - usually because of the road's end.

But regardless of how the business owners got there, is the path towards separating the houses from the business viable as described ?
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If you're looking for a coherent answer, you're going to have to express yourself a lot clearer than you have here and in the opening post.

Every proposal is viable if you don't mind paying tax. But viable and wise are often two separate things,
 
@BB

Winding up the company prevents owners from selling it as a going concern, surely ?

The property/capital transaction seems okay to me as a layman. Credit the Property a/c and debit the Capital a/c - the business loses the investment property but reduces its debt to the owners by the same amount.

Maybe I need to ask someone close to home on this thing. Paying CGT once is right. But paying CGT twice is skinning a business owner.
 
I know someone who could unravel all of this, and reduce your tax bill.
I am facing a similar situation myself, one of the properties is worth 1.5M
I tend to refer to the properties as my own, but thats an illusion.
 
trajan said:
the business loses the investment property but reduces its debt to the owners by the same amount.
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Debt? The owners gave a loan to the company?

The owners gave all the company's capital to it.

As such, in accounting terms at least, the business owes its owners all the capital in it.
 
@fistophobia

I think that a lot of Ltd Cos might have done this sort of thing though maybe only to the extent of getting 1-2 houses.

I'm not saying that they were not unwise to have begun a long term commitment without proper tax/accounting/legal advice.

Just that it happens. And especially when people see 12.5% corp tax versus the higher income tax rate of 40 % applicable to sole traders and when they are bursting to bag a house and settle down like everyone else.

We can compare advice later when I get it.
 
trajan said:
But paying CGT twice is skinning a business owner.
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Not really. It's just the outcome of bad tax planning or no tax planning.

You probably thought you were saving tax by paying Corporation Tax on the rental income instead of Income Tax on your rental income if you owned it.

But as I said in my first response - ask the professional who drew up this tax plan in the first place. Or ask the accountant or tax advisor who did the company's tax return. Did they ever ask you why you were doing it this way?

Brendan
 
trajan said:
@fistophobia

I think that a lot of Ltd Cos might have done this sort of thing though maybe only to the extent of getting 1-2 houses.

I'm not saying that they were not unwise to have begun a long term commitment without proper tax/accounting/legal advice.

Just that it happens. And especially when people see 12.5% corp tax versus the higher income tax rate of 40 % applicable to sole traders and when they are bursting to bag a house and settle down like everyone else.

We can compare advice later when I get it.
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But the rate of CT on rental income is 25% and there's a close company surcharge on top of that, assuming there's not been dividends paid... so the comparison isn't anything like 12.5% vs 40%; it's more like 39% vs ~50%, along with the conundrum of how / when the value can be realized by the owners...
 
trajan said:
Debt? The owners gave a loan to the company?

The owners gave all the company's capital to it.

As such, in accounting terms at least, the business owes its owners all the capital in it.
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You appear to be describing the owners' equity.

The transaction as you seem to be describing it would therefore be a distribution - it's effectively a dividend, albeit being paid in the form of property instead of money - and therefore liable to income tax on the full value of the properties passing out of the company, in addition to the CGT liability of the company, so you could be looking at an aggregate tax cost of 60% - 75% of the properties' value...

Get proper advice.
 
Is there also a VAT issue when a company sells a property which they bought new?
I remember a relation trying to buy an apartment in Sandymount. It turned out the seller had bought it through their company. It was a mess and they ended up walking away.
 
There is a reason every company director doesn't buy property through the business instead of paying income tax and buying it personally. It's messy. The Revenue are onto this years ago. If they don't get their tax at the beginning, they'll get it at the end. If they own 12 properties, that's a lot of work. You need expert advice. Even the accountants on here won't given generic advice on it.
 
Towger said:
Is there also a VAT issue when a company sells a property which they bought new?
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In the most general of terms, there shouldn't be, as the VAT on property regime was reformed about 15 years ago, but this is the least of the owners' worries here.
 
T McGibney said:
In the most general of terms, there shouldn't be, as the VAT on property regime was reformed about 15 years ago, but this is the least of the owners' worries here.
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If they bought > 15 years ago, did not pay (offset) the VAT at the time, then sold now. Would Revenue not still come calling to collect the VAT on the new sale price?
 
Towger said:
If they bought > 15 years ago, did not pay (offset) the VAT at the time, then sold now. Would Revenue not still come calling to collect the VAT on the new sale price?
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Impossible to tell based on such scant information.

That said, there is no VAT on the sale of residential property.
 
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