We look at 5 Tax tips when buying commercial property in a company. It can make good investment sense. But you should know what you are getting into. The taxes we focus on are
- Stamp Duty
- Vat
- Tax rate & surcharge
- Pay a dividend
- Selling the property
Dick Jagger arranges to meet you. I can’t get the words of Sympathy for The Devil out of my head.
“Please allow me to introduce myself I’m a man of wealth and taste”
Dick is looking to buy a commercial building in Slane for €500,000 that has two existing tenants in place. The property, known locally as “The Mall” is Slane’s tallest building with 4 stories. The tenants pay rent of €50,000 per annum. His company Jagger Moves Ltd has the money to buy it. He’s not sure if the company should buy it or if he should buy it in his own name.
John Elton is selling the property. He bought it in September 2014 from the developer for €350,000 when it was completed.
Stamp Duty
The stamp duty rate for commercial property is 7.5%. The stamp duty cost will be €37,500. It will be the same cost if he buys it, or the company does. The rates for residential property are lower at 1% on the first million and 2% on the cost above 1 million.
Vat
Vat on property can be a complex area and you will need to get advice from your tax consultant on this. There are many concepts here and the Vat cost will very much depend on the circumstances of the case.
The first supply of a completed property, within 5 years of its completion, is liable to Vat. In this case, it is not the first supply as John Elton bought it in 2015
The second and later supply of a completed property within 5 years of its completion is subject to Vat. This is the position if the property wasn’t occupied for 24 months in total. This rule doesn’t apply here. It is more than 5 years since completion and tenants have been in place for more than 2 years.
John Elton was charged Vat of €47,250 when buying the property and claimed this back. While the sale of the property is Vat exempt if John doesn’t charge Vat, he will suffer a vat clawback. Because of this, he wants to put a clause in the sales contract to have the supply subject to Vat. This is what is called the “Joint Option to Tax”
The advantage for John is that he doesn’t suffer a Vat clawback. Whether it be Dick or his company, the purchaser takes on the Vat responsibility, which is a 20-year Vat life.
Tax rate and surcharge
The tax rate on the rental income in the company is 25%. The much talked about 12.5% corporation tax is for trading income. As the company is letting the properties, that is investment income and liable to tax at 25%.
The company has 18 months after the year end to distribute the after-tax rental profits to Dick.
| Jagger Moves Ltd | Year ended | 31 December 2023 |
| Rental Income | €50,000 | |
| Tax Payable | 25% | €12,500 |
| Rental Profit | €37,500 |
The company has until the 30th of June 2025 to pay a dividend to Dick of €35,500. Don’t worry this is not a typo. Once the net left is €2,000 or less there is no surcharge. Dick’s company doesn’t pay the dividend, so the surcharge is as follows.
| Rental Profit after tax | €37,500 | |
| Close company surcharge | 20% | €7,500 |
| Net rental profit | €30,000 |
The total tax on the rent in the company is €20,000 or 40% with the surcharge.
Pay a Dividend
To avoid the surcharge the company pays Dick a dividend of €35,500. It does this in January 2025. The company must deduct dividend withholding tax [DWT] from the payment at 25%. The company pays this to Revenue.
| Gross dividend | €35,500 |
| DWT 25% | €8,875 |
| Net payment to Dick | €26,625 |
Dick will be liable to Income Tax on the gross dividend for 2025. Let’s assume that Dick is a top-rate taxpayer at 52% he will pay tax on the dividend as follows
| Gross dividend | €35,500 |
| Tax [Income, PRSI, USC] 52% | €18,460 |
| Less credit for DWT | €8,875 |
| Additional tax liability | €9,585 |
Dicks net cash position is
| Net Dividend | €26,625 |
| Less additional tax liability | €9,585 |
| Net to Dick | €17,040 |
We saw earlier that if the money stays in the company the effective rate is 40% including the 25% tax rate and the surcharge.
If Dick uses the dividend route the tax leakage is
| Corporation Tax | €12,500 |
| Dividend withholding tax | €8,875 |
| Additional Tax liability Dick | €9,585 |
| Total | €30,960 |
Revenue get close to 62% of the rental income. Dick can’t get no satisfaction.
Selling the property
It’s 2030 and we are all flying around on our hoverboards and e-scooters. Jagger Moves Ltd gets an offer of €750,000 for the property which is too good to refuse. Capital Gains Tax [CGT] is a consideration and it works out like this
| Sales Proceeds | €700,000 |
| Less costs of sale – legal & accounting | €10,000 |
| Net proceeds | €690,000 |
| Less Costs | |
| Purchase Price | €500,000 |
| Stamp Duty | €37,500 |
| Legal & Accounting | €7,500 |
| Gain | €145,000 |
| CGT 33% | €47,850 |
| Net cash in the company | €642,150 |
The problem for Dick is that this money is in the company and not in his pocket. He needs to get his hands on some cash owing to a recent divorce. He decides to liquidate the company and get the money out. The liquidator charges €12,150 and pays Dick €630,000.
The payment to Dick is a payment for his shares and he is liable to Capital Gains Tax on this payment. His CGT liability looks like this
| Sales Proceeds | €630,000 |
| Less Cost of shares | €100 |
| Gain | €629,900 |
| Less Personal exemption | €1,270 |
| Taxable Gain | €628,630 |
| CGT 33% | €207,448 |
I am picking myself up off the floor here when I see the numbers. But this is correct. There is a double CGT hit. First, the gain in then the company is liable to CGT and second Dick is liable to CGT on the money he receives for his shares.
As an aside when John Elton sells the property in 2022, he would be able to get the benefit of the CGT exemption. As he bought it before 31 December 2014 a large part of the gain would be exempt.
Summary
This is a quick overview of some tax issues you may not be aware of when buying and selling commercial property. Whether you buy personally or in a company will depend on many factors. With commercial property there will be Vat issues and, as mentioned, it can be complex, so advice is a must.
Everyone will have different circumstances. Where is the money? Is the property for trading or investment purposes? What are the personal tax rates of the buyers? Other taxes like PRSI and Gift or Inheritance tax can also be at play. It is vital to understand the long terms plan, the reasons behind the acquisition, and the personal circumstances of the buyer.
Don’t give all your money to Revenue and make a grown man cry. Need advice? Start here
