“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Franklin D. Roosevelt
Last week we looked at some of the tax implications of buying property in a company. We came down on the side of not recommending it. We are not against buying property but not a fan of buying it in a company. This is due to the double hit to Capital Gains Tax [CGT]. To review last week’s blog Read here
This week we want to help you understand more about the double hit to CGT using a worked example. We also want to look at some other tax implications that are worthy of mention.
OMG 2 hits to CGT!
Bruno ltd purchased a property for €150k in 2016 and sold the property in 2020 for €305k. The costs of sale were €5k. Bruno has a lot of time on his hands, so much so that he has been reading Comerford Foley blogs about buying property. He has decided that he wants to make his next property acquisition in his name and not through the company. Yet, to do this he will need to get the funds out of the company. He knows it will be difficult to get funds from the bank in the current environment. What will he get net of taxes?
| Gain in Bruno Ltd | €150,000 | |
| CGT in Bruno Ltd | 33% | €49,500 |
| Net Cash in Bruno Ltd | €250,500 |
Bruno wants to liquidate the company to get the money out so appoints a liquidator. The liquidator’s role will be to gather up all the cash, pay any debts, and transfer the balance of funds to Bruno. Let us assume the liquidator’s fees are €5.5k. This leaves a balance of cash in the company of €245k. The payment the liquidator makes to Bruno is cash in exchange for Bruno’s shares. This makes the payment liable to Capital Gains Tax. Bruno formed the company in 2016 to buy the property and he owns 100 shares that cost him €100. This is his base cost.
| Payment for Bruno’s shares | €245,000 | |
| Less cost of shares | €100 | |
| Gain for Bruno | €244,900 | |
| Less Personal Exemption | €1,270 | |
| Chargeable Gain | €243,630 | |
| CGT | 33% | €80,398 |
| Net to Bruno | €163,232 | |
| Total CGT – Bruno Ltd & Bruno | €129,900 |
You tell Bruno the news on a call and as it is not a Zoom call he can google “best accountants in my area” without you knowing.
In the above scenario, about €130k of the €150k gain is winging its way to Revenue.
Don’t spoil the relief of retirement!
When you are selling your business in the future one of the most relevant taxes is Capital Gains Tax. This could be a sale to a third party or a transfer to the next generation. Retirement relief is a CGT relief when you are making a disposal of business assets. For more information on this relief Read here You have to be over 55 and under 66 to maximise the reliefs. The reliefs are still there for those who are 66 or over but the value of the reliefs reduce. You don’t have to retire but you do have to dispose of business assets.
Shares in a family trading company are business assets. An investment asset like a rental property is not. If the asset mix in your trading company is not right, you will be diluting the value of the available relief. This can create a CGT liability where, with proper planning, it should not arise at all. We can look at an example to show this.
Eamon owns 100% of the shares in Green Party Ltd and has been working in this company full-time since 2005. He is 56 now and wants to sell the business to the management team to pursue political interests. The company is a trading company whose main business is the sale and plantation of trees.
The formula for calculating the relief is
Chargeable Business Assets [CBA]
Chargeable Assets [CA] Includes CBA’s
The value of the business is as follows:
| Plant & Machinery | CBA | €50,000 |
| Goodwill | CBA | €200,000 |
| Stock | €40,000 | |
| Debtors | €160,000 | |
| Cash | €250,000 | |
| Trade Premises | CBA | €130,000 |
| Rental Property | CA | €200,000 |
| Total Assets | €1,030,000 | |
| Less Creditors | €300,000 | |
| Value of shares | €730,000 |
Chargeable Business Assets €50,000 + €200,000 + €130,000 = €380,000
Chargeable Assets CBA’s €380,000 + Rental Property €200,000 = €580,000
| €730,000 X | €380,000 | |
| €580,000 = | €478,275 |
In the example, Eamon will get Retirement Relief on €478,275, instead of on €730,000. His CGT position would be as follows:
| Gain | €730,000 | |
| Less Retirement Relief | €478,275 | |
| Taxable Gain | €251,725 | |
| Tax Payable | 33% | €83,069 |
You will see from the above example that having the investment property in the company cost Eamon €83,070. Eamon should sell the property before selling the shares. Then, at the date of sale, all the assets in the company would have been chargeable business assets. He would have converted the property to cash and there would have been no dilution of the relief.
Summary
We would stress the importance of having a close relationship with your accountant. This is important before you decide on buying a property. Talking with your tax advisor can be very important before deciding to buy property in a company or not. For fear of boring you too much, we tried to keep this blog as short as possible. One other area to watch out for is Business Property relief. This is a relief for gifting shares in your company to family members. Again, you need to be wary of non-trading assets. We will look at this in a future blog. If you have any queries please contact us. Don’t hesitate to give Deirdre a call on 051396703 and she will point you in the right direction
