Key Post: Company to hold investment properties

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Tommy

Guest
(This discussion took place on the old AAM
here 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 reading and understanding the full thread - Brendan



boffin11 said ------------------------------

Is there any advantage, tax or otherwise, in using a limited company to hold investment properties (for rental income purposes)?

RainyDay said ------------------------------
Would there be stamp-duty savings when you come to sell the property, i.e. sell the company (not the property itself) and benefit from lower stamp duty rate on share transactions compared to property transactions?

Brendan said ------------------------------

Most advisors recommend owning property personally rather than through a company.
If the company sells the propery, it pays CGT on the gain. If you distribute the money to yourself as the shareholder you will pay income tax at your marginal rate, or at best, you will pay CGT. So there will be a double hit of taxation.
If you leave the rental income in the company you will pay Corporation Tax and a surcharge on undistributed investment income. When you evenutally distribute the rental income to yourself - you will pay either corporation tax or income tax.
Selling the company instead of the property will limit the number of purchasers interested in the property. A propery is easy enough to check out. A company could have undisclosed liabilities. If a company is buying a company which owns the property, it gets even more complicated from a tax and accounting point of view.
Even businesses are advised to buy their business property in their personal names and not through the company. But the case for this is not as strong with CT rates down to 12.5%.

MOB said ------------------------------
The rule of thumb I give people is that if you are buying a capital asset as an investment which you will want to "cash in" at some stage you should buy in your own name. For a trading company, if you are buying an asset which is always going to belong to your business (i.e. a family business which will be handed over), it might make sense to let the company buy it (because otherwise it has to be bought out your after tax income, costing almost twice as much). Because of the lower Corporation Tax rate, assets held within a company will grow more quickly, but it makes little sense to build up property investments within a pure investment (i.e. non trading) company unless you are taking a very very long term investment strategy.
Also, the Stamp Duty saving does not really arise in practice. As Brendan points out there are problems in offloading a company, and these are usually reflected in much higher professional fees on a sale of a company, with both accountants and solicitors getting their trotters in the trough.

Brendan said ------------------------------
I don't want to build up investments for the sake of them. I always look at the eventual money in my hand. Let's say I want to buy an investment property for the ultimate long- term i.e. to leave after me. I will leave a company owning a property and having lots of cash. Wouldn't that be better in my beneficiaries' hands as a property and less cash than a company owning more assets ?
Am I making sense ?

MOB said ------------------------------
I agree with you about company versus personal property holding up to a point. It is the way I personally would go. However, many people are chiefly concerned about accumulating assets and assets will undoubtedly accumulate quicker in a company. There is extra tax when it comes to taking out money, but if that problem is years away, you would be surprised how many people are happy to worry about it later.

Brendan said ------------------------------

I know we are deviating a bit from the original question but...
Some people get a sense of control or power by having lots of assets. However, if these assets are in a company, they are worth less.

If someone wants to build up assets, they could consider setting up a pension fund - it should be more tax efficient.
Back to Boffin's original question.Let's say that I have £100k and want to buy a property for £500k. It is better to do that in my own name than to set up an investment company, to which I would lend the £100k. Do you agree ?

MOB said ------------------------------

I am guilty of over generalising; A pure investment company (if I remember rightly) gets taxed with an extra levy on undistributed income, eroding the benefits outlined below.

However, if you make a few assumptions as follows, the results are not uninteresting:
1. Assume, for the sake of argument that your capital asset generates a return of 7% before tax and is valued at 400,000.
2. Assume that your personal income will be taxed at an average (marginal) rate of 40%. I think this is reasonable, because our hypothetical property owner will have other personal income, so allowances and actual average tax rate on total income are not relevant
3. Assume that corporate income will be taxed at an average of 15%

For the company, after tax return ( 7% less tax @ 15% ) is an effective 6%
For the individual, after tax return ( 7% less tax @ 40%) is an effective 4% (well, 4.2%, but I used 4% in my calculations, so indulge me and yes the other figure should be 5.95%, but I rounded off that as well)

So the first thing is that you have more money going to work for you. The second thing is that if this money is wholly reinvested, it too is getting a higher rate of return under the corporate umbrella. (we are after all talking here of the man who is pre-occupied with accumulating). I'm not much of a man for spreadsheets, but I plugged those figures into Microsoft money and the results are as set out below:

Personally held
10yrs 592k
20yrs 876k
30yrs 1.3m
40yrs 1.9m

Corporate
10yrs 716k
20yrs 1.28m
30yrs 2.3m
40yrs 4.1m

Maybe my assumptions are a little screwy, but the point is that a slightly higher rate of return on the investment will eventually be worthwhile. In the foregoing example it's roughly a dead heat after 40 years for net cash in hand (assuming you liquidate and pay an average of 40% tax on what you take out of the company). From 40 years on, the company is winning on all fronts. It's probably of more relevance to somebody who is building up assets in a trading company, rather than a pure investment scenario.

Newman said ------------------------------

Using a company to purchase the property on behalf of the owner/director is generally most efficient through a pension mortgage.
The company re-pay the principal on the loan capital through the pension fund whilst any rental income pay the interest repayments. At all stages the property is in the ownership of the director. I've yet to see a neater deal!

Brendan said ------------------------------

Hi Newman
Just in case anyone misunderstands your post:
The employee buys the property in his own name. The company doesn't buy the property.
The employee takes out an interest only mortgage and the employee pays the interest on the loan.
The employee receives the rent from the tenant.
The company's only role is in paying into the pension fund. It has no involvement with the property as such.
Pension mortgages for commercial property are discussed more fully at www.askaboutmoney.com/ubb/Forum16/HTML/000016.html

Jem said ------------------------------

Hi Brendan,
I would sumarise the situation as follows:
If the person is at the present a proprietary director.
1 buys the company in own name interest only mortgage
2 Company pays into pension with same to clear loan.
3 depending on type of property (not house) interest allowed against the rental income.
4 The company gets the tax relief on the pension against its profits.
Note the rental income does not belong to the company it is the persons.

If the person is not a proprietary director and just a "paye employee" or a sole trader there is no point in forming a company for the above as the company has no income to set the pension against.

If the later is the situation you can still take out an interest onlyloan and pay into the pension to clear same however you will only be able to get tax relief up to your limits ie
up to 30 years 15% of net relevant earnings
30-40 20%
40-50 25%
50 years up 30%

note all pensions are taken into account and also rental income is not taken into account in calculating nre.
Hope I have been somewhat clear

jem
 
C

cmc

Guest
company holding investment property

This is an interesting discussion. I notice it dates from 2000. Some of the information is at best out of date and some of it was never accurate.

With regard to accumulating assets in a company there is no basis for MOBs suggestion that the rate of tax would be 15%. The rate would be 25% Corporation Tax plus 20% close company surcharge, giving a rate of 45%. The wealth would not accumulate more quickly in a company.
 
M

MOB

Guest
Re: company holding investment property

"The rate would be 25% Corporation Tax plus 20% close company surcharge, giving a rate of 45%."

The surcharge is - as I understand it- a tax on undistributed investment income. It doesn't really have any bearing on the decision which many business owners have to take on whether to buy their trade assets (including the business premises) personally or through the company. Clearly, if you rae buying investment properties to rent out, different considerations apply

WRT to the corporation tax rate, I had understood that it is on the way down to an intended target of 12.5%; Has this changed, or was I wrong in that assumption?
 
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cmc

Guest
property in company

There are at least 2 possibilities, either the asset is a property being used in your trade or it is an investment property.

If it is being used in the trade and no rent is being charged then tax on annual income tax is not relevant, neither are the figures outlined by MOB above, and the double CGT charge on extracting the property from the company is more important. Accordingly the property should be held personally if possible.

If the property is being held as an investment and is generating rental income then the surcharge is very relevant and individual will only benefit from low rates of corporation tax if he keeps the rental income in the company. If he distributed the income he will pay income tax. However if the income is not distributed he will pay a close company surcharge. The rate of corporation tax is 12.5% for trading income only, the rate for rental income is 25%
 
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daltonr

Guest
Re: property in company

If the property is being held as an investment and is generating rental income then the surcharge is very relevant
The surcharge is on undistributed investment income yes?
Does reinvesting it count as distributing it? i.e. if all the rental income is ploughed into acquiring shares or more property then does the surcharge apply?

Also

either the asset is a property being used in your trade or it is an investment property.
If the company is an investment vehicle, then isn't any property bought being used in the trade. I.e. the Investment Trade.

-Rd
 
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Tommy

Guest
Re: property in company

Does reinvesting it count as distributing it? i.e. if all the rental income is ploughed into acquiring shares or more property then does the surcharge apply?
Yes- the surcharge applies in these instances.


If the company is an investment vehicle, then isn't any property bought being used in the trade. I.e. the Investment Trade.
Technically, rental income is not categorised as "a trade" under the rules of our tax system and as such is governed by has a slightly different set of regulations compared to trades, professions and other businesses.
 
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daltonr

Guest
Re: property in company

Yes- the surcharge applies in these instances.
Interesting. I wasn't sure how that worked.

So, to sum up:

Ability to Build a lump sum : Company wins.

Tax on the Return from an Asset: Company wins but not by
as much. Surcharge applies.

On getting money out of the company you pay further income
tax. But if you are thinking long term (40 years, or possibly thinking of next generation, the ability to efficiently build a portfolio of assets which generate income makes the company an attractive option).

In simple every investor would like to acquire enough assets to provide a stream of income that exceeds his/her living expenses, and the company looks lie a way of doing that more quickly.

I couldn't quite get my head around the talk about pensions, so I'll have to re-read that.

The way I think of it is if the bulk of my income stays in the company, and I pay as small a salary as I can live on, then I have more money under my control at the end of the year than if I took all my income as salary.

If I can use the money in the company to buy assets then I get a little closer to making the company self financing. It depends less on income from my work.

-Rd
 
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Tommy

Guest
Re: property in company

Hi Rd,

If you or anyone else is thinking of using a company as a vehicle for a property investment, you will need to weigh up all the pro's and cons, including

(1)the double-charge to CGT when property is sold by a company and the company shares liquidated to give the benefit of the proceeds to the shareholder(s)

(2)accountancy (and possibly) audit fees & other similar costs

(3) the effect of the close company surcharge on investment & rental income.

- etc etc.

In general, due especially to point (1), it is generally considered to be a bad idea to acquire property in the name of a company, unless in certain circumstances. Professional advice and compreshensive research would be essential before doing anything.
 
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daltonr

Guest
Re: property in company

Tommy,

I'm not talking about setting up a company for the purpose.
I'm talking about a company which already exists and which has more income than is required in salary.

In that situation the company can be used to accumulate a lump sum more quickly than an individual could accumulate the same lump sum. Therefore a portfolio of assets can be acquired more quickly.

I was not thinking in terms of selling property and taking the proceeds out of the company, the company would simply continue to pay a salary.

But I take your point. The surcharge and additional taxes do make things complicated.

-Rd
 
P

Pat

Guest
.

Just wondering did you go anywhere with this? Im a proprietry director and am thinking of purchasing an investment property through the company. Seems like the right way to go, but Im not sold yet...thoughts since last year?

Pat
 
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jayoirl

Guest
Re: .

Curious how people all view this. People spend way too much time convincing me that I should hold all property personally. But let me outline my situation:

I own a ltd company that is making a profit. On the profits I've made I pay 12.5% corp tax. The money stays in the company. I buy a propery in the company and say it cost's €300,000 (for simplicity includes stamp, fees, etc). To get this I needed to make €337,500 in the co. On this propery I get €1,000 / month rental. Less expenses to run the place I get about €9,000 / annum before tax. Pay tax @ 25% and I am left with €6,750. And the a surchage of 15% on that again if I don't move the money. So I am left with approx €5375 after all taxes for re-investment.

Say I buy it personally. I need to about €600,000 (PRSI and PAYE at 42%) - much harder to earn. On the €300,000 purchase I get €1,000 pm. Less expenses leaves €9,000 taxable @ 42%, or €5220 after all taxes for re-investment

In the co situation, I can grow my assets quicker than personal because a) it takes less effort to get capital (less tax) and b) even after surcharge tax I've more left over.

Ok now the problem of get at the cash personally. In the personal buy sitation you can sell the house and pay 20% CGT and you done.

In the company you'll get the double CGT BUT you should have grown more assets quicker and if it's a long term thing 25+ years. On rough figures I can buy two houses in the co. for every one personally (300k vs 600k).

So I buy one every 5 years (if you're lucky enough to earn 600k personally!!!). After 25 years that's 5 personally and 10 in the co. Assume the following growths of property (and don't even start about inflation and standard 6%, keep it simply for demonstration)

Year House(s) Bought and their gain at Yr 25

Year 0: 200k
Year 5: 150k
Year 10: 100k
Year 15: 50k
Year 20: 20k
----
Total €520k

So at year 25, personal growth is 520K, pay 20% cgt. Into hand you've €416k.

At the co. you could buy twice as much, so you've 1,040k in the co. Liquidate. Pay 20% CGT on 1,040k and you're left with 832k. Pay 20% CGT on liquidation (and ignore liquidation costs about 10k). You're personally left with about 665k.

Ok, so I've simplified a number of things here to make the figures more presentable and the method work - e.g. I ignore all rent income and focus on capital gain.

They key to this situation is to be able to use the co. trading income as the cash generating engine to buy the property. It's much cheap (in tax terms) to generate with 337k in a co, than 600k personally.

After that it's a no brainer.

One more thing called retirement relief on a business premises for 10years or more €1.5m tax free if sold at retirement. But that's another story.

Now that I've told you all how to be millionaires. You'll have to buy me a pint! :)

Jason.
 
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jayoirl

Guest
Re: .

BTW I should say I hold my PPR personally (after all that). This suits banks, etc. and also means that if I upgrade I've no CGT personally. The property mentioned above is purely investment.
 
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oilean

Guest
Re: .

Jason,

If your company is generating €300k per year, first off good man, but secondly there is a lot more ways of reducing tax bills than the method above, you should definetly get some expert tax advice

But if it accumlating this money , I am guessing every five years (as that is how often you are considering buying a house) then there is still some points that could alter your numbers

The biggest one is that investment properties have to be purchased with pre-tax or post-tax income, whether it be after 12.5% or 47% (42% + 5%)
A deposit will sufffice

They can be purchased with bank borrowings


If you have a company making good money and it requires a premises you will be entitled to retirement relief on that premises whether in your own name or the companies

You have already concluded that the after tax effect is of little difference between company and individual on rental income but if it is in your name then you can rent it to your company
This rental income in your name can be more tax efficient than salary, plenty of tax incentives for property investment
(These would be availible to a company also but you still haveto liquidate (or other) the company)

It must be let at market rates but market rates can vary greatly depending on the length of a lease
You could receive a very good income from the property and still in theory have a guarenteed tennant (your company)

Your way might suit yourself but there is always different options and with the amoount of money you are talking about some god planning advice would be relatively cheap in the long run

Stu
 

Brendan Burgess

Founder
Messages
39,617
Re: .

Hi Jason

You obviously have a reasonable understanding of tax and you raise some very interesting points. I need to check my understanding of corporation tax. I need to check yours as well!

If you generate 337,500 - you will pay €42187 Corporation Tax, leaving you with €295k, not €300k. If your company is supplying professional services such as an IT Contracor, you will you have to pay a 7.5% surcharge on this undistributed income which will cost another €22k leaving you with only €273k.

I think it is very important to point out to anyone reading this thread, that it only applies to a company which is generating large taxable profits. In other words, the advice to property investors, who don't already have a profitable company, still holds good - buy a property in your own name and don't set up a company to do it.

When CGT was at 40% and Corporation Tax was much higher than the current 12.5%, it was a no brainer that property should always be bought in a person's name. The reduced taxes makes it worth revisiting the issue.

For simplicity, I have taken a company with €100,000 of taxable profits. After 10 years with a rental income of 3% gross and 5% per annum Capital Gain, I get the following figures:

A) Pay salary and invest net proceeds: €88k
B) Buy through company and liquidate after 10 years: €109k
C) Contribute to your pension fund: €144k

I need to recheck my figures, or if someone else would like to check them I would appreciate it. ( email me at brendan@askaboutmoney.com for the spreadsheet). I have a gut feeling that A) should still be better than B), but I can't see my error. If B) is better, I would like to know it.

So Jason is right to a point. If tax rates stay the same, he will be better off buying the property through his company. But there are at least two big problems:

1) If CGT or CT rates rise, the advantage may disappear.

2) You have to liquidate the company to get the money. This may not be a commercially good idea. Of course, if it is a professional services company with no assets, then it won't matter too much. Or do the Revenue treat such companies differently?

3) The pension fund approach beats the other two by a wide margin. It is less likely to be affected by tax changes. It's a bit worrying to have all your assets in a company, in case something goes wrong with the company e.g. a large law suit.


Oilean raises an interesting point about borrowing which I have to think through. There is nothing to stop the company borrowing. So I don't think it affects the decision.

I would need to check out the figures again, but this would be my initial call on the best strategy:

Set up a self administered pension fund
Plough the €300k a year into it, up to the funding limits.
You can now borrow through the pension fund to maximise your returns ( and risks).
 
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daltonr

Guest
Re: >> Company to hold investment properties

Brendan,

Having spent the guts of 12 months pondering this issue, i've come to the same conslusions as yourself.

For a PAYE worker there is no point in setting up a company to deal in pure property investment on a small scale using only your after tax personal income as funding.

If you have a company with profits in excess of what you need to live on, and you have a reasonably long term investment strategy, it's better to plough the excess into a self administered retirment trust than draw it out and pay income tax immediately.

Surcharges on the Profits of undistributed earnings and on certain types of business (e.g. IT Contractors) make investing profits directly into assets a bad choice for many. The SART gets around this by getting the profits out without either Corporation Tax, Surcharges, or Personal Income tax being paid on them.

The SART also has the benefit of allowing the assets to grow tax free within the trust. No CGT, no income tax on the assets bought, sold or owned while in the Trust.

You will pay tax on retiring but a lump sum is tax free (No tax of any kind ever paid) and the remainder can be drawn out as needed (Income tax paid only once).

My only remaining issue is whether the assets in the SART have to be liquidated on retirement. If the Trust owns 10 houses, can it continue to own them and make an income from them, or must they be sold?

If you continue to own the houses do you start to pay tax on the rental income or are they considered to still be in the trust?

If the houses are transferred to the individual and the trust is dissolved is there are Capital Aquisitions Tax liability?

-Rd
 
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Tobesure

Guest
Hi Tobesure

This is a Key Post. Please don't take it off in another direction. Ask you questions in a separate thread.

Brendan
Administrator
 
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johnshort

Guest
Would it be possible to sell a company owned property to yourself at the original purchase price or lower to avoid CGT? This is assuming that the current market value is higher than the original purchase price.
 

CCOVICH

Frequent Poster
Messages
8,831
Would it be possible to sell a company owned property to yourself at the original purchase price or lower to avoid CGT? This is assuming that the current market value is higher than the original purchase price.
I'm pretty sure that this would be an artificial transaction and that market value would be applied by Revenue to come to a CGT liability.
 
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