Vacant Property In My Company – What are my options?

Hello there from a very calm Tramore. Looking out the window here all I can see are young lads heading to school. There are plenty of scooters. Push ones for the smaller ones and all have one thing in common. Schoolbags that are too heavy for the bodies that are carrying them. Lads look like they are auditioning for a job as a sherpa in the Himalayas. It’s great that they are getting a workout before school. 

On a separate note it’s looking “positive” for the ending for restrictions. I love this quote that I saw recently

“Once this is over I’m gonna do a reverse quarantine and not go home for six weeks”.

This is true for me, well for a few days anyway, as am off to Kilkenny for the weekend. I sent Michael and Leo an e-mail last night telling them of my plans. Given that I was such a good citizen they assured me they will extend the pub opening times past 8 o clock. This helps a lot with planning the day as I don’t have to hit Tynans at lunchtime.

Last week we looked at having the use of a company car and what the cost will be for you in different situations. In case you missed it see here

This week we will look at having vacant property in your company. It was a question that came from a client. They outgrew their office as it was too small, and the location wasn’t ideal. They were looking at their options. We didn’t sit down to go through the finer details yet, but it got me thinking. We will look at

  • Setting the scene
  • Renting as offices
  • Converting to apartments
  • Selling to a shareholder or a third party
  • Summary

 

Setting the Scene

Fionn Nolan and his brother Bill Nolan own Unreal Services Ltd [USL] 50:50 which is trading very well. They are twins and will be 50 later this year. USL purchased a city centre office in Galway in 2007 for €700,000. They traded there until December 2020 and moved to a larger office at the edge of the city. The property has been vacant for over a year now and they would like to do something with it and need to decide. They spoke to their local auctioneer Mary Lynskey. She confirmed the current value of the property is €400,000. The Nolans want to know their options if they sell it, rent is as offices, convert to apartments, or they buy it.

 

Renting as Offices

Mary thinks the rental value as an office is €18000 per annum. Her view is that there isn’t much demand. Given the location, with traffic and a lack of parking, she thinks there’s better value outside of town. Her view is that they could double the rent if the offices could convert to 4 apartments. But there would be a cost to that of course. Assuming an insurance cost of €1000 the rental profit would be €17000

Rental Profit €17000
Tax USL 25% €4250
Net income after tax €12750

 

If Fionn & Bill don’t take out the net income after tax the company will pay a close company surcharge of 20%. This brings the effective tax rate in the company on the rental profit close to 40%. After tax and surcharge, the net left is approx. €10200. To avoid the surcharge the lads can take a dividend, but they will pay tax on this at 52%. To read more on how the surcharge works see here

 

Converting to apartments

Mary isn’t sure of the cost of converting to apartments, but she thinks there wouldn’t be much change out of €250,000. She recommends getting a QS to cost it. For now, they estimate a cost of €300,000. This would bring the total spend on the building to €1 million. Despite this, it would double the rental income to €38000, based on 4 apartments at a monthly rental of €800 for each. They estimate annual running costs for insurance, repairs, letting fees, etc at €8000. This will leave a net rental profit of €30,000.

Rental Profit €30000
Tax USL 25% €7500
Net income after tax €22500

 

Again, Fionn and Bill have the option of taking the after-tax profit as a dividend or paying the surcharge. If they pay the surcharge the net left in the company is approx. €18000. As they see it the spend of €300000 will give the company an extra €8000 per annum. It will take them 37 years to recover the investment. Mary thinks that they would sell for €200000 per apartment. If they sell, they want to know if there is Capital Gains Tax to pay

 

Sales Proceeds €800000
Less Cost of building €700000
Less Enhancement expenditure €300000
Loss on sale €200000

 

This loss is in the company, but it cannot offset the loss against trading profits. It can be offset against other gains liable to CGT. Now they have no other assets. They can look at buying assets, like shares, and they can shelter the gains on those up to €200000. At 33% the loss is worth €66000 but is worth nothing now. The question for the Nolans is do they want the hassle of spending €300000 to make an extra €100000?

 

Selling to Shareholders or a third party

If there is a sale from USL to Fionn & Bill this is a connected party transaction. [sound like money going from Fianna Fail to Fine Gael]. As such Market value rules apply. To recap the market value is €400000. Fionn and Bill or one of them would have to pay the company this to buy the building. None of the two are in funds to buy it and if they buy it, they will have the same dilemma as the company. Do they rent it for €18000 per annum as offices or do they spend €300000 to convert to apartments? Plus, if they buy it together is that a good idea? One may want to sell it in the future and the other may want to hold onto it for the income

 

From a company point of view, the sale generates a loss

Sales Proceeds €400000
Less Cost €700000
Loss €300000

 

Given this is a sale to a connected person the company can only use this loss on a gain on a sale to the same person. So, if Fionn and Bill buy it, the loss can only go against a gain on the sale of an asset to Fionn and Bill in the future. This is very unlikely to happen.

 

If they sell to an unrelated third party, then there is no issue with using the loss. In tax terms, the loss is worth €100000. If they can get €400000 by selling the office, they would consider buying shares. They know they can shelter gains of up to €300000.

 

Summary

The above is looking at the CGT position and doesn’t consider Vat, stamp duty, or future CGT reliefs. Having investment assets like shares and property in a company can impact CGT reliefs. We touched on this in a previous blog concerning Retirement Relief – see here. Once the Nolans hit 55 Retirement Relief comes into play for them, but there are other conditions to meet. The purpose is to give you an idea of some of the options and issues that arise from this type of situation. Everyone’s circumstances are different so it will pay you to get good advice.

 

Did anything in this blog pique your interest? If you think we can help you call Deirdre on 051396703 or contact us. Tell us about you and your business and we will see if we can help.

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