Should you buy a property in your company? This is a question we get asked many times. My answer in most cases is NO. This week we will look at the reasons why it is not a good idea. We will look at the main tax implications of buying property in your company. The focus of this is an investor buying a residential or commercial property for letting.
Last week we looked at taking a salary or dividends from your company. We looked at a few different scenarios where there was not an equal shareholding. If you want to find out more about that Read here
Property is an Irish obsession. We all love hearing about large property sales. Our national broadcaster is very aware of this. So, it is why they are bombarding us with property and garden programmes. We love looking at other people’s properties. Especially the before and after pictures and the move from catastrophe to bliss. We love the drama of the deadlines and budgets and things going wrong. We also love the outcomes, where all who wanted to kill each other a few weeks earlier are now best friends. They are having a beer and admiring the finished product.
Misconceptions
The main reason people consider purchasing a property to let in a company is that the tax rate is lower in a company. Ireland has a very progressive tax system so the more income you earn the more tax you pay. Our top Income Tax rate is 55% which is for the self-employed who have profits greater than €100,000. The effective tax rate for high-income earners is usually between 35% and 45%. This takes into account lower tax bands and tax credits. The effective tax rate increases as the income increases.
The tax rate in a company on rental profits is 25% and not 12.5% which is for trading profits. Let us look at an example to show this.
Mary, a successful solicitor, has a profit in 2019 from her legal practice of €110,000. She owns two houses and has a rental profit on those of €25,000. She is a single parent. For more info on tax rates and tax credits Read here
| Total Income | €135,000 | |
| First €39,300 | 20% | €7,860 |
| Next €95,700 | 40% | €38,280 |
| Total | €46,140 | |
| Less Tax credits | €4,650 | |
| Net Tax | €41,490 | |
| Add PRSI | 4% | €5,400 |
| Add USC | Various | €8,721 |
| Total Tax liability | €55,611 | |
| Effective Tax rate | €55,611/€135,000 | 41% |
| Rental Profit Tax – €25,000 | 41% | €10,250 |
The tax paid in a company on the same rental profit at 25% would be €6,250 so in this case, there is an initial saving of €4,000. We can call that one-nil to a company.
What makes it one all?
The answer is the close company surcharge. The company pays this surcharge when the investment profits are not paid out. This increases the effective tax rate in the company to close to 40%. The surcharge on the rental profit is as follows:
| Rental Profit | €25,000 | |
| Deduct Tax paid | 25% | €6,250 |
| Net after Tax | €18,750 | |
| Deduct [assume trading company] | 7.5% | €1,406 |
| Amount liable to surcharge | €17,344 | |
| Surcharge | 20% | €3,469 |
When you add the surcharge to the 25% tax in the company, the total tax comes to €9,719. This is an effective tax rate in the company of 39%. The tax saving in a company is now only €531. We will call that one all!
If I sell or the company sells the property?
If there is a gain on the sale, we are looking at Capital Gains Tax [CGT] and the rate for an individual or a company is the same at 33%. As the rate is the same then this is not an influencing factor in your decision to buy the property in a company or not. The main factor is that if the company sells the property the money belongs to the company. It stays in the company and does not belong to you, so you have to get it out. How can you get it out? The money can come out as salary or dividends and that has tax implications. – Read more here You could also liquidate the company and pay Capital Gains Tax at 33% on taking the monies out.
It is very tax-inefficient to have the property in the company as the tax rates on the income are similar. The big difference is when selling the property and getting the money out of the company. There is CGT in the company on the sale. There is also CGT for the individual when taking the money out of the company on a company liquidation. This potential double CGT hit is the killer and so investors need to be wary. The CGT reliefs like Retirement Relief and Entrepreneurs relief are generally not available.
If you own the property yourself and sell it then the money is in your back pocket and not in the company. You have it in your bank account and not in the company’s. You do not have the cost, worry or hassle of trying to get that money back out of the company. Two one to the individual!
Summary
In general, it is not a good idea for investors to have property in a company. It is also not a good idea for trading companies to hold investment assets. They can dilute tax reliefs that can impact on a sale or transfer of a business down the line.
We only looked at the taxes on Income and sale in this blog. Other taxes that can come into play are Stamp Duty, Vat, and even Gift/Inheritance Taxes. We would caution that everyone’s circumstances are different. Examine if buying property in a company would be a good idea for them or not.
As always please seek professional help. If you feel a consultation would be beneficial for you on this topic before jumping in please contact us. Or give Deirdre a call on 051 396703 and she will point you in the right direction
