Renovation Property as a Business

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signalc

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I am considering buying a property to renovate and sell on again. I'm wondering about the most tax efficient way of doing this. I have a limited company already, so I have a couple of avenues of approach.
  1. Buy the house in a personal capacity (will fund privately without finance) and renovate it in a personal capacity and then sell it. I think I am liable to pay CGT but cannot reclaim VAT as I have used the allowance for the Home Improvement Incentive Scheme.
  2. Buy the house in a personal capacity again, but use my company structure to renovate it and charge me personally for the cost. Again, I pay CGT on uplift minus cost charged by the company (which reclaims and charges VAT on inputs). Is there an incentive here for the company to charge me for the entire uplift if I was to pay profit into pension fund or am I just increasing the VAT take?
  3. Third option is to loan money to the limited company to buy the property, renovate and sell. Does the company still get a deduction on the VAT if it is not charging VAT on the sale? Again, I think the company pays CGT on the profit and I have to chose to pay corporation tax, income tax, or put into pension after that. Are there other downsides to this structure that I'm not considering in terms of buying and selling the property as a Ltd. company such as stamp duty or transfer of ownership etc.?
Appreciate any advice anyone has to offer on this one. I've heard that the revenue treatment of property investment is stacked against private involvement, but does this only relate to renting?
 
signalc said:
I am considering buying a property to renovate and sell on again.
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That looks like income tax not CGT particularly if you have a building company.

VAT is complex in residential property. A second hand house which is outside the VAT net may stay outside the VAT net.

RCT will apply to all payments to subcontractors.
 
Thanks for the reply Joe. A couple of follow ups, if you don't mind.

It is not currently a building company, but I would presumably need to change the articles to make it so if I was to go ahead on this.

Is there a rule of thumb as to what would trap a property within VAT net? If the house stays outside the VAT net, would I still be entitled to reclaim VAT on inputs.
 
Probably most tax efficient way would be to set up a self directed company pension scheme (company can pay company funds directly in). Then buy the property through the pension scheme (its possible to borrow as well through the fund), renovate etc. If you rent the property rent goes into the fund tax free, if you sell the property there is no CGT. If you plan it carefully you will pay little tax but obviously it is a long term solution rather than a 'flip'.
 
Thanks Jimbobp. That sounds interesting alright. Am I right in thinking that any profit or gain generated within the pension fund would be tax free. Where I'm coming from is that if the pension was to operate as a serial developer in this way, gains would probably class as profit rather than capital gain.
 
The first consideration is whether this would be a viable venture or not.

In the UK, this is widespread, but the cost of fixing up houses in the UK is very low.

In Ireland, it wasn't viable up until recently because of the combination of high stamp duty and high building costs. .

People do report making profits on it, but most of those profits come from the increase in value of the underlying property and not from any value added by the renovation.

It will be viable only if you get a good bargain when you buy and if you do most of the work yourself.

You should not use a company for the purposes. You are just incurring an additional layer of administrative and tax complexity for no obvious advantage.

What are your other sources of income? If you have trading income and you lose money on this venture, then you should be able to set the losses on the sale of the property against your other income if you do it in your own name.

If you do it as a once-off and make a gain, you might well be able to justify that it is subject to CGT which would be more effective.

Of course, if you do it repeatedly, then you would be trading and subject to Income Tax,PRSI and USC.

Brendan
 
Jimbobp said:
If you rent the property rent goes into the fund tax free, if you sell the property there is no CGT.
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Pension funds are only a deferral of tax. When you retire these profits will be subject to tax.

I would not advocate a pension fund for something like this. You will need a trustee involved and so will be adding an expensive layer of administration.

Brendan
 
Brendan Burgess said:
Pension funds are only a deferral of tax. When you retire these profits will be subject to tax.

I would not advocate a pension fund for something like this. You will need a trustee involved and so will be adding an expensive layer of administration.

Brendan
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I didn't say I would advocate it Brendan, I said it would probably be the most tax efficient way of investing. As regard the deferral of tax, that would depend on how soon the OP wanted access to all of the fund. If he was to take a TFLS at retirement, put the balance in an ARF/AMRF and when he had access to the fund, keep withdrawals below the joint allowable threshold when over 65, it could be taken tax free.
 
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