Incorporation of Property Assets
When a person is deciding to hold a property through a company or personally, there are a number of issues to be considered.
Due to the fact that personal tax can be in excess of 50% in Ireland, the incorporation of property assets should be considered as it may be possible to reduce the overall effective tax rate.
In the past, it was generally considered that holding assets through a corporate vehicle was not advantageous, primarily due to the double exposure to capital gains tax (CGT) on the sale of the property. However, in the current taxation climate, and depending on an individual’s personal circumstances, holding property through a corporate vehicle is certainly worth evaluating. As with all restructuring proposals, there are both tax and non-tax issues to be considered.
Possible Lower Effective Tax Rate
One of the key advantages of holding a property through a corporate vehicle is the ability to achieve a lower overall effective tax rate on any rental income being generated from the property. As mentioned above, the marginal rate of tax (which includes income tax, PRSI and USC) on rental income on property held personally can be in excess of 50%.However, the rate of tax on such income within a company is 25%. One aspect that would need to be considered is the close company surcharge on such income. In broad terms, this is an additional surcharge on investment income generated in companies which are controlled by five or fewer individuals. The effect of the surcharge is to bring the overall effective tax rate on such income to 40% a rate which is still lower than the marginal income tax rate. In some circumstances however it may be possible to manage the close company surcharge, thereby achieving a tax rate of 25% on this income
Extracting Personal Income from Company
Of obvious concern to an individual will be the reduced level of available income in his/her hands, given that the income now accrues to the company. The owner can still draw down any additional income in the normal manner i.e., by salary or dividend, both of which will be subject to income tax, PRSI and USC in the individual’s hands.
Improved debt repayment/ Debt Sourcing
An added benefit of holding a property through a corporate vehicle is given the lower rate of tax on income, the ability to service debt will be enhanced. It must be noted also that certain banks prefer to lend to a limited company so debt sourcing may be an easier process.
Tax Considerations on Sale
If a person plans to purchase a property through a limited company and sell on quickly, this structure may not be the most efficient as CGT should be considered. On the sale of the property, the company will be liable to CGT on any uplift in the property from the market value at the date of transfer to the date of sale. The tax costs on extraction of the after-tax proceeds from the would also need to be considered. It may be possible to structure the sale as a sale of the shares in the company, rather than the underlying property, thus avoiding the potential double CGT exposure, but this will depend on the combined preferences of both the vendor and the purchaser and may be influenced by both tax and indeed non-tax issues.
Determine How Much Equity to Assign Each Employee
Certainly for those individuals who may wish to pass the property to the next generation, it is worth planning for this as early as possible, as holding a property through a company can work efficiently from an estate planning perspective. Many parents want to retain control over the company and the rights to any income flow from the company during their lifetime, but ultimately pass value in a tax efficient way to their children on their death. One such option would be to allow the children to purchase the future interest in the company shares at the outset (i.e. they will only become entitled to the shares on the death of their parents).This option would require some detailed tax planning but it can very efficient if the property portfolio is large.
Obviously the overall financial position and intentions of the individual must be considered before any incorporation of property proceeds, in order to assess the relative tax advantages. However we have put together corporate structures for clients which have improved their overall tax efficiency.
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