Time of the year. More tax meetings with Company Directors than normal. Some are with clients and others are one-off consultations. A wide range of topics discussed. From electric cars to Income Protection, a lot of issues looked at. The question is always, what should I do? Let’s look at some of these to include
- Electric Car
- Salary
- Pension
- Preparing a company to sell
- Summary
Electric Car
Tom Dunne has a company and contracts into a multinational, Stark Inc, based in Dublin. He’s based in Cork and works from home most of the month. The bosses in Stark would like to see a bit more of him. In Tom’s head that’s 3 trips a month of 450 kilometres so 1350 kilometres in total. He’s thinking an Electric car is the way to go.
Will that work for him? The car he’s looking at is €60,000. To buy the car the borrowing in the company would be €900 per month. My initial thoughts aren’t positive. This sounds costly but best to have a look at some numbers.
2023
Tom’s company buys the electric car on the 1st of September 2023. This is a category A car based on CO2 emissions.
| Business kilometres-Sept to Dec | 5400 |
| Annual equivalent- Jan to Dec | 16200 |
| Cash value of the new car | €60,000 |
| Deduct 2023 [€35,000+€10,000] | €45,000 |
| Net value | €15,000 |
| €15,000 x 22.5% x (122/365) | €1128 |
| Tax costs 52% | €587 |
| Monthly cost | €147 |
2024
| Annual equivalent- Jan to Dec | 16200 |
| Cash value of the car | €60,000 |
| Deduct 2024 | €20,000 |
| Net value | €40,000 |
| €40,000 x 22.5% | €9,000 |
| Tax costs 52% | €4,680 |
| Monthly cost | €390 |
2025
| Annual equivalent- Jan to Dec | 16200 |
| Cash value of the car | €60,000 |
| Deduct 2025 | €10,000 |
| Net value | €50,000 |
| €40,000 x 22.5% | €11,250 |
| Tax costs 52% | €5,850 |
| Monthly cost | €488 |
From 2026 onwards there is no deduction, so the cash value of the car is €60,000. The BIK value increases to €13,500 a year which is a tax cost of €7,020. That’s a monthly cost of €585.
For Tom, the key takeaway is that it gets very expensive for his company to help save the planet. When you add the tax cost to the borrowing it’s costly for the company to go down the electric car route.
I am not completely knocking electric cars in a company. My understanding is there are lower-cost models on the way that would be suitable for short trips. A runaround. Tom decided he’ll use his existing car for the trips and buy a cheaper second car for when he’s not there. They can make sense when there are higher business miles and the company doesn’t have to borrow to buy it.
Salary
For our regular readers, I can hear you say, “Oh no he’s not blabbering on about salary again”. Yep, sorry, but it always comes up.
We moved Mary’s business from a sole trader to a company a few years ago. Her husband Bill works for the company and Mary’s focus is to get a pension set up for him. Her salary is €65,000 and Bill is on €25,000. They are not maximising their lower rate bands.
For 2023, a single person can earn €40,000 at the lower rate of 20%. For every euro above that, 40 cents wings its way to happy Michael & Paschal. A married couple can earn €80,000 at the lower rate. But you need to be aware of how that works.
| Max lower rate-married/civil partner | €80,000 |
| Max for higher earning spouse | €49,000 |
| Max for other spouse/civil partner | €31,000 |
As such, Bill can earn another €6,000 at the lower rate. They were looking to increase salaries in 2024. It works better for Bill to get the increase and not Mary.
| Additional salary Bill | €6,000 |
| PAYE/PRSI/USC – 28.5% | €1,710 |
| Net Salary | €4,290 |
If Mary gets the increase, her tax rate would be 48.5% leaving her with a net salary of €3,090. A tax saving of €1,200. Not huge but still puts an extra €100 into their pockets each month.
Pension
I don’t know what it is about the word Pension but the minute you mention it, people switch off. It’s like “I don’t want to know, don’t be talking to me about pensions” Well tough, because I am. And going back to my meeting with Tom
He was taking a salary from his company that gave him a net of €5,000 per month. And he needed every bit of that to cover bills. When we dug down a bit deeper, he was putting some money into savings but also paying €500 per month into a pension. Ok, he saves money through the tax relief, but he still pays it every month.
| Monthly Pension Contribution | €500 |
| Tax relief – 40% | €200 |
| Net cost | €300 |
Tom paying into a pension makes sense. Saving for his retirement to give him extra income. The State pension won’t pay for the annual holiday to The Canaries.
Tom should set up a company pension scheme and pay the €500 every month from there. The company will get a tax deduction for the payment as a business expense. Plus, he’ll save €300 per month from his net salary. The company is in funds to pay it and the company can make higher contributions or tops ups too. Provided those payments are within the funding limits.
Funding Limits
Stay with me on this as those two words would even put me asleep. The key message is that the company, in general, can put more contributions in than an employee. Tom’s gross salary is €75,000 and he’s 43. He can put 25% of that amount into a pension each year. That’s €18,750.
The problem is that Tom doesn’t have that amount to put in given all the other bills. In a company situation, the company can fund a pension to give Tom up to 2/3rds of his final salary. That’s a pension of €50,000.
A fund of €1,000,000 at a 5% drawdown would give him a pension of €50,000. In effect, this is a cash extraction technique. Your company is funding your pension, and this is your asset when you exit the company. It’s good to know what the company pensions journey looks like. And we haven’t even mentioned the tax-free lump sum of 25% of the fund to a max of €200,000!
Preparing to Sell
Bridget is preparing to sell her business. I met her on a Zoom call last week. Zoom still brings back bad memories of March 2020 when we were all getting used to it. Still a mighty piece of tech.
Her main issue is that she has a commercial property in her trading company. In some cases, this wouldn’t be an issue. But the purchaser will buy the shares of the trading company and not the assets. She wants to move the property to another company so that she can let it to the purchaser. It will generate an income for the new company. Her options are
- Set up a holding company structure and transfer the property to the Holdco or
- Set up a new company and transfer the property there
Needless to say, she wants to do this in the most tax-efficient manner possible.
The taxes involved here are Capital Gains Tax [CGT], Stamp Duty, Vat and Corporation tax. We’ll focus on CGT and Stamp Duty. Saying that she’ll need to get specific advice on Vat on property.
Holding company structure
The first option is to set up a holding company structure. She’ll own 100% of the shares in the Holdco and that in turn owns the shares in the Tradeco. So, Bridget’s at the top, Holdco is underneath and Tradeco is at the bottom.
A transfer of the property from Tradeco to Holdco is a disposal so CGT and stamp duty are due. There are reliefs available but with conditions. Let’s assume the property cost €200,000 and its value now is €400,000.
| Sales Proceeds | €400,000 |
| Cost | €200,000 |
| Gain | €200,000 |
| CGT 33% | €66,000 |
| Stamp Duty 7.5% | €30,000 |
A total tax cost of €96,000. Throw in legal fees and we are up to the €100k mark.
Provided the Holdco owns 90% of the Tradeco there is a stamp duty relief. That would save €30,000. You’ll need to be sure to claim the right relief here. There’s a clawback if the structure doesn’t stay in place for 2 years. Also, there’s no CGT once there’s a CGT group. That’s where the Holdco owns 75% or more of the Tradeco. Again, a clawback arises if one company leaves the group within 10 years.
The main benefit of the Holdco structure is no CGT on the sale of the shares in Tradeco. I’ll say that again. No CGT. But (there’s always a but) the structure must be in place for 1 year to get the CGT exemption.
Say she sells the shares in the trading company for €3,000,000. The CGT on that, before any reliefs, at 33% would be €990,000. If the Holdco sells the shares and qualifies for the CGT exemption, there’s no CGT. But the money is in the Holdco. Saying that there’s an extra €1 million in there.
That’s the decision for Bridget and one she’s mulling over at the moment. If she sets up a new company, not a holding company, there will be CGT and Stamp on the transfer.
Summary
In all the meetings we have there are so many different sets of circumstances. It’s vital that you consult with your advisors before doing anything. You want to go into any transaction with all the relevant facts, so you understand the pros and cons.
Often, small changes can lead to savings. A few hundred euros a month is a few thousand a year but could be a hundred thousand over 30 years. Clients that have invested in a quality bookkeeping system with us have a strong foundation. That, coupled with meetings during the year, builds a great relationship to help them in any way we can.
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