In order to avoid charging vat on existing rental income the new house could be bought under a different legal entity i.e. if the existing house is in own name buy the new house under self and spouses name (a partnership!). Income tax could also be saved. If you have a rental profit and hopefully you will at some time the fact that the vat will be deducted from the rent received before computing your rental profit will ensure that you have less income and a lower profit. You therefore also save tax at 46% of the VAT amount (aproximately 10% of the net rent). Example
400k house, 10k fit out. 3k legal fees. Loan 100k Annual interest 4.5k Vat reclaim in period one 49,833
Rent €1,000 per month. VAT charge from commencement of rent monthly vat bill of €174 to be paid to revenue.
Income tax assuming all at marginal rate
Vat rgd Non Vat Rgt
Rent net of vat 9,917 12,000
Interest 4,500 4,500
Expenses -say 1,000 1,000
Capital allowances 1,033 1,250
Taxable profit 3,384 5,250
Tax at 46% 1,557 2,415
Saving of €858. This pays back almost 41% of the vat to be repaid. So not alone do we have a timing difference we also have a tax saving!!
Comments please.
400k house, 10k fit out. 3k legal fees. Loan 100k Annual interest 4.5k Vat reclaim in period one 49,833
Rent €1,000 per month. VAT charge from commencement of rent monthly vat bill of €174 to be paid to revenue.
Income tax assuming all at marginal rate
Vat rgd Non Vat Rgt
Rent net of vat 9,917 12,000
Interest 4,500 4,500
Expenses -say 1,000 1,000
Capital allowances 1,033 1,250
Taxable profit 3,384 5,250
Tax at 46% 1,557 2,415
Saving of €858. This pays back almost 41% of the vat to be repaid. So not alone do we have a timing difference we also have a tax saving!!
Comments please.