Investment Advice: Transfer Current Investment Property into New Ltd Company & Purchase Additional Investments Through Same Company?

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Peader2468

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2
Age:38
Spouse’s/Partner's age:38

Annual gross income from employment or profession: €110,000 base + c. €60,000 bonus - private sector company director

Annual gross income spouse: €28,000 - self employed / part time

Home House Value: €475,000

Home House Mortgage: €308,000 with PTSB @3.00% for next 5 years. Repayments c. €1,400 p/m

Investment Property Value €230,000

Investment Property Mortgage: €157,000 with PTSB @5.65% for next 5 years. Repayments c. €980 p/m

Investment Property Costs: Service charge, Insurance, Property Tax c. € 200 p/m

Investment Property Rental Income: €1,900 p/m

Other borrowings – car loans/personal loans etc: None

Pension Scheme:
Yes - I contribute €916 personally and my company contributes €641 p/m
Her - None

Dependants: 2x kids; 4yr and 2yrs

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

I’ve established a new , separate business to my annual gross salary noted above and it is on track generate c €600k gross profits within 24months. I’m considering using these initial profits from this business to purchase my current personal investment property and potentially buy a second investment property.

Question 1: I want to reduce my personal outgoings each month and free up cashflow, which is why I am considering transferring my Investment property to a Ltd Company - the limited company will use its profits to clear my personal mortgage on the investment property and reduce my monthly liabilities by €980 (the investment mortgage amount). Based on the above information, we think that transferring our current investment property and buying any future investment properties via a dedicated Ltd company is the best solution for us, to minimise personal income tax and manage transfer of property to our kids in the future, but welcome any comments if others believe otherwise?

Question 2:
I want to establish a company structure from the outset that will enable my wife and I to have controlling shares over the Ltd company that holds the property investments, but have my kids named as shareholders in the company for future estate planning purposes to minimise future tax inheritance implications. Is this possible is have young kids named as shareholders or have shares held in trust?

If so, what would this shareholding structure look like?
 
There are plenty of threads already explaining why you should not own property through a company in Ireland.

In summary, the company pays tax on the rent. The company pays CGT on any capital gain.
You personally pay tax on any dividends from the company. And you pay CGT on any gain when eventually disposing of the company.

Keep it simple.

Brendan
 

Key Post: Company to hold investment properties

(This discussion took place on the old AAM in December 2000. I have reproduced it here so it can be marked as a Key Post. Tommy ============== Because it's an old post, some of the tax figures have changed and the decision is no longer as clear cut as it was. Don't make any decision until...
www.askaboutmoney.com
 
Hi Brendan,

Previous posts are noted, but my understanding is my situation is slightly different as I want to utilise the €600k within my Company A Ltd in a tax efficient manner.

My objectives are:
1) To clear the mortgage on Investment Property 1
2) Buy Investment Property 2 without a mortgage
3) Retain the properties and pass onto my kids.

The two options I considered are;

Option 1 - Retain the Investment Properties in my Name.
To achieve my objectives, I will have to extract the profits from the Company A Ltd , which will result in c. €312k in personal income taxes that will have to be paid, and I will have €288k left as cash to use. I use €157k of this cash to clear the mortgage for Investment Property 1. I will then be left with €131k in cash to buy Investment Property 2, which will be insufficient without another part mortgage.

In this option, I expect the net rental income into my hand after tax will be c €816 p/m, based on €1900 gross rent minus €200 expenses per month, remaining €1700 taxed at 52%.

Option 2 - Transfer Investment Property 1 to Company A Ltd
To achieve my objectives, I will use Company A Ltd to buy Investment Property 1 (IP1) from me and clear the mortgage:
IP1 purchased Sept 2023 for €225k. Assuming market value is €235k, there is a €10k gain. I will be personally liable for CGT at 33% = €3,300.
Stamp duty of 1%, Company A will be liable for €2350.
I estimate the total cost for Company A to buy IP1 will be €237,350. This will clear the mortgage (€157k) and release my cash equity in the property of €68k minus €3.3k for CGT.
In this option, Company A remaining profit of €362k (€600k minus IP1 costs), resulting is sufficient funds to purchase Investment Property 2 without a mortgage. I might be missing something, but this sounds like a more tax efficient option from Company A perspective, compared to Option 1?

Comparing the rental income, Option 2 does reduce the net cash income after all taxes from €816 p/m (Option 1) to c. €612 p/m (Option 2), based on the following Option 2 assumptions:
Rental Income €1900 gross rent minus €200 expenses per month, remaining €1700 taxed at 25% within the company, and a further personal income tax of 52%.
Difference being c. €200 p/m - I acknowledge there will be accountancy costs etc that Option 2 Company A will incure that will further reduce the monthly net income.

Unless you can highlight any glaring mistakes above, I'm leaning towards Option 2 for the following reasons - but welcome your comments / advice!

- Utilising Company A profits in a tax efficient manner, rather than paying €312k in tax to extract cash as in Option 1
- I can utilise remaining profits in Company A to purchase Investment Property 2. This will also generate a rental income, and when IP1 and IP2 net rental incomes are combined, they will exceed the estimated rental income of Option 1
- It will release c. €65k in cash equity from IP1, back into my pocket
- Company A will have two investment properties, mortgage free. The company will have the option to retain any profits generated to potentially buy a third and fourth property down the line - note there will be a c. 15% surcharge tax on profits if retained for over 12months.
- I also didn't mention the option of establishing a property management company to manage these properties in the future, which would open up the option to reduce the company taxes further as the prop management company would be a trading and only liable for 12.5% tax.
- As I intend to retain the properties and pass onto my kids, I do not plan on disposing and will avoid getting hit with CGT at the exit. As per my original post, I'm seeking advice on Company A structure that will have shares held in trust for the kids - they own part of the company at the time IP1 and IP2 are purchased/transferred - thus limiting their exposure to tax implications down the line.
 
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Peader2468 said:
I want to utilise the €600k within my Company A Ltd
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So the first question is why have you accumulated €600k cash in Company A?

Get back onto the tax consultant or accountant who came up with this plan and ask them how to extract it in a tax efficient manner.

It's not easy, but maybe liquidating the company might work.

Then you will have cash - if only €300k - with which to buy properties in your own name.

Brendan
 
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Hi Brendan/Peadar

I looks to me like like option 2 is by far the better option. Am weighing up similar situation myself in relation to the purchase of an industrial property as an investment and even tho most of the threads on here advise strongly against it nobody has been able to illustrate why option 2 is not the most efficient?
 
Hi Joseph

The principles are set out in the Key Post. Did you read that?

If you have read that and still think it's a good idea, then set out the plan in your own specific case and, if there is a flaw in your reasoning, we should be able to see it.

There have been many threads here over the years asking "How do I get a property out of a limited company without being crucified for tax?" so it would be interesting for you to show how it's a good idea to get an investment property into a limited company.

Brendan
 
Hi Brendan

Thanks for reply. Yes have read Key post and related others. And it still appears to me that option 2 is best for Peadar.

Is it fair to assume that you think option 1 is the better of the two? (if you had to choose between just those options)

Dont know if you saw the article in the Sunday Business Post yesterday in relation to two well know galway brothers with a lot of commercial prop assets. All are held through limited companies - a different limited company for each asset (over 80 in total !)

Would you suggest that this is probably the correct structure for them? And if so why them but no one else?
 
It's very clear that Option 1 is right for all the reasons set out in the Key Post.

The correct structure for someone buying an investment property is to do it in their name.

If you have a development operation with different shareholders and 80 properties, there may be reasons for doing it via companies. I assume to do with limited liability, joint ownership and maybe bank funding.

But if you want to own an investment property through a limited company, before you do it, you should set down on paper why you are doing it and what the pros and cons are. If your tax advisor advises you to do it that way, then you should get him to explain in writing why.

But I would invite you again, to set out your own personal circumstances and reasoning for owning it through a company and others may comment on it.

Brendan
 
Thanks Brendan, will set out my own situation in detail when i get time.

Have currently got commercial investment properties in my own name which generate good income and are debt free.

Also have a limited trading company with c300-400k profit pa, some of which could be used to service debt on an investment asset.

Dispite the extra risk involved it seems to me that debt is one of the few things that beats the very onerous inflation tax we all pay!

But because of the extra risk involved with debt thats why it might be better not to have personal liability.

Anyway it would also be interesting to know what route Peadar eventually took
 
I strongly disagree with the position that there can no justification for choosing to hold property via a limited company. For those that do not need the cash for personal cash needs, a company can be beneficial for many reasons e.g.
- lower effective tax rate on income within the company can allow for faster debt paydown and reinvestment of additional profits to new ventures within the corporate structures
- extending the pool of potential lenders to those who are restricted from lending directly to individuals
- potential to introduce new equity investors without selling the property
- potential for additional deductibility of expenses under corporation tax rules
- cash extraction as set out by the OPs option of using excess corporate cash to purchase personal investment properties
 
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BigBoots82 said:
lower effective tax rate on income within the company
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Yes, Corporation Tax rates are lower than Personal Tax rates, but it's an additional tax and not an alternative tax. After you pay your Corporation Tax, you will have to pay Income Taxes or CGT when you eventually take it out.

So this only applies if you want to build an empire for the prestige of owning an empire and not for the tax-efficient benefit of having more cash for you and your family.
 
This thread relates to investment properties.

Neither of the above are applicable to investment properties held within a limited company structure.
BigBoots82 said:
- cash extraction as set out by the OPs option of using excess corporate cash to purchase personal investment properties
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The logic here totally escapes me. Why would someone even ponder triggering a CGT-assessable gain to put a property within a structure that would entail a double CGT charge to unwind it?
 
BigBoots82 said:
- extending the pool of potential lenders to those who are restricted from lending directly to individuals
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Can you give some examples of this?

It is very easy for an individual to borrow for an investment property. I would guess that the lenders you are referring to are more expensive. Certainly the legal costs will be higher.
 
Last time I checked the corporation tax rate on rental profit was 25% (40% if you suffer the additional surcharge in the case of closr companies). This is a significant reduction in the potential 55% personal rax rate applicable to rental income of individuals.

Re your 2nd point consider this: if I personally have a cash need of €10m and my company has surplus cash of €10m should I (a) take a dividend of €10m cash which potentially leaves me personally with net after tax of €4.5m cash or (b) have the company buy the property from me for €10m which assuming I have cgt base cost equivalent to the value of the property leaves me with €10m less transaction costs (immaterial in the context of figures involved). Call me crazy but I know which option I'm taking. And don't tell me I should sell the property instead. This is an opportunity/cost decision. If i have no better use for the €10m in the company I'm in for this.

I've worked in legal/tax for over 15 years and never seen anyone incur two layers of cgt. People buy companies. That's life whether you like or agree with it or not.
 
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Brendan Burgess said:
Can you give some examples of this?

It is very easy for an individual to borrow for an investment property. I would guess that the lenders you are referring to are more expensive. Certainly the legal costs will be higher.
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Yes more expensive but also generally will lend on terms which your
main street lender won't e.g loan to value requirement can be much higher in the context of alternative lenders, may be willing to take a 2nd charge behind senior finance to reduce your equity requirement, speed to transact also is a significant benefit versus main street.
 
25%+20%=45%?
BigBoots82 said:
(b) have the company buy the property from me for €10m which assuming I have cgt base cost equivalent to the value of the property leaves me with €10m less transaction costs...
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How realistic is such an assumption in an inflationary era?
 
BigBoots82 said:
People buy companies. That's life whether you like or agree with it or not.
Click to expand...

If anyone were fool enough to buy a company with an unrealised capital gain, they would want a significant reduction on the market value.

Trying to sell a property in a company would greatly reduce your potential market and further depress the price.

And the whole theme of your strategy was that you would keep buying properties in the company. So now you are stuck with a property company owning 10 companies. Not many buyers for that.

On the other hand if you build up a portfolio of 5 personally owned properties, you can easily sell one or more of them.

Brendan
 
T McGibney said:
25%+20%=45%?

How realistic is such an assumption in an inflationary era?
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Seriously? It's effectively 20% as there is a deduction in the surchage calculation of the initial ct of 25% e.g. rental profit of 100. Ct charge is 25. Surchage is 20% of 75 which is 15%. 25% plus 15% = 40%

More realistic than you might think given the fluctuation in property values in Ireland over the last 20 years.
 
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I'm sorry but your line of thinking is not the only one with merit in the investment world. Time value of money matters and the world is wider than just your average Joe Bloggs on the street with his 1 or 2 investment properties
 
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