Key Post Selling a property held within a company.

I referred a social contact who asked me about this to askaboutmoney, but the posts on it are all quite old. So I will write an up to date post on the issue to check if my understanding is correct, and if there are any tax planning issues. I will simplify some of the facts to focus on the key issues. I have told him to get tax advice.

Purchase price: €100k (IR£ equivalent)
Date of purchase: 1988
Value in 2016: c. €1m
Company is not trading and has no other assets or liabilities.
I presume he set up the company with no share capital in 2008.
He distributed the rent to himself as dividends

Option 1 - The company sells the property and then the company is liquidated and he receives the proceeds

Sales proceeds: €1m
Indexed cost: €150k (€100k @1.553)
Capital gain: €850k
CGT @ 33%: €280k
Net proceeds in company: €720k

Liquidate the company and receive €720k
Cost: 0
Capital Gain: €720k
CGT @33%: €240k
Net proceeds in his hands: €480k

Note that the effective rate of tax through holding the property in a company is 52%.

Option 2 - Sell the company instead of the property

Sales proceeds: €720k
CGT @33%: €240k
Net proceeds in his hands: €480k

Option 3 - Liquidate the company and distribute the property to himself
I presume that there is no advantage in doing this?

If he liquidates the company, the company will pay CGT on the disposal of the property.

He will still receive net assets of €720k on which he will pay CGT.

Tax planning issues

If the property is part of a business, he might qualify for Retirement Relief. (Doesn't apply in this case.)

If he has CGT losses elsewhere, he could set these against his personal gains.

Brendan Burgess said:

Gooner

Thanks very much for that correction. I have edited the posts accordingly. I was a bit surprised when I did it first how heavy the tax hit was.

Brendan

Click to expand...

Hi Brendan

In option 1 above, you seem to be saying that there is a double capital gain charge, firstly within the company when the property is sold and secondly when the company is liquidated. This is not usually the case.

In a members voluntary liquidation (which includes the sale of the property within the company) there is only a single charge of 33% on the liquidated balance.

Ive always felt that this point has been missed on AAM in discussions regarding owning property within companies.

Dr Debt


That is very interesting.

So the liquidator sells the property and pays no CGT.

The liquidator pays the €1m to the shareholder who pays tax on the €1m capital gain?

Is that correct?

Brendan

But Option 1 involves the sale of the property by the company (thus triggering its CGT liability in respect og the property) and then the subsequent liquidation of the company (thus triggering the shareholder's CGT liability in respect of his/her shares)...

Yes, but what Im saying is that in the event of a members voluntary liquidation, and where the property is sold as part of that process,
it is taxable only once at 33% (not twice)

Hi Dr Debt

I know what you are saying. But when is it taxable? By the company? By the Liquidator? By the shareholder?

Good topic Brendan,
I would be interested to know how Dr Debt works it out - where the CGT charge is levied.
Like you, intuitively I'd assume CGT would be levied twice.
Would you also be able to index the share capital? The company can't have just bought the property without debt or some equity? (small change in the overall scheme but might save a few pennies).
Andy

Andy836 said:

Would you also be able to index the share capital?

Click to expand...

You would, but most companies have only €2 share capital. They finance the acquisition through borrowing.

Brendan

One of the disadvantages of owning a property through a company is the "double bite" of CGT.

Brendan, your first calculation of CGT is correct: the company pays CGT and the shareholder pays CGT.

In practice, tax advisors would look at tax planning opportunities of Compensation for Loss of Office, Early Retirement Relief and Pension Planning to reduce the ultimate tax liability.

Having carried out a large volume of Members Voluntary liquidations, I have never seen a company escape a CGT liability that was due on the sale of a property.

During the depths of the property collapse, we did a number of MVLs and transferred properties to shareholders at the then depressed valuations, so that the shareholders could benefit directly from any price appreciation, and thereby avoid the "double bite" OF CGT. (One advantage of a MVL is that there is no stamp duty on an in specie distribution to shareholders.


Jim Stafford

Jim

That is great. Thanks for clarifying that.

Brendan

So, the owner of the shares in the company should try to sell the company rather than the property.

Obviously, buyers will value the company less than the shares, but if a buyer were prepared to pay more than €720k for the shares, the seller would be better off.

Brendan

Brendan Burgess said:

Obviously, buyers will value the company less than the shares, but if a buyer were prepared to pay more than €720k for the shares, the seller would be better off.

Click to expand...

Yes, the seller would be better off. But easier said than done for the following reasons:

• The purchaser would find it more difficult and costly to obtain finance to purchase the shares. To obtain adequate security, the funding bank might have to go through a complex "white wash" procedure to take security on the property. Legal and accountancy fees would come in at about €10,000 + VAT.
• The purchaser would have to go through a costly due diligence procedure to determine that the company did not have undisclosed liabilities.
• The purchaser would be concerned about the future "double bite" of CGT going forward.

Jim Stafford