The building is let by you to the company, for a gross rent of €18,000 per annum which you declare in your annual Income Tax return.
No VAT is charged on the lease. VAT was not reclaimed on the purchase of the property in 2006
The company would take out a loan to purchase the property.
You need to assess the tax aspects of the transfer and any alternative proposals.
You had viewed the personal ownership of the property as an integral part of funding your eventual retirement. Therefore, you also need to know how the transfer would affect this aspect.
we will examine the tax implications under the relevant tax heads
- Capital Gains Tax (CGT)
- Income Tax (IT)
- Corporation Tax (CT)
- Capital Acquisitions Tax (CAT)
- Stamp Duty (SD)
We will consider both immediate and possible long-term results.
Capital Gains Tax
The transfer of the property will be a disposal for Capital Gains Tax. As you are a proprietary director you are deemed to be a connected person. This means that the market price of the property is deemed to be the consideration for the transfer regardless of the consideration paid.
As the market price of the property is less than your purchase cost there will be a loss on the transaction. Because you are connected to the company this loss is ring=fenced. It can only be used to offset a future gain in another transaction you may have with the company. It cannot be used to offset other gains.
Future CGT Implications
The issues to consider here are
- Future disposal of the property
- Eventual Retirement/Exit
At present if you made a gain on a future disposal of the property, it would be liable to CGT. The current rate is 33%. The position could differ if it were part of a business disposal. We will cover this later.
If the company sells the property it would be taxable on any gain at 33%. Any extraction of the proceeds by you would be taxable in your hands as follows
On extraction via liquidation or sale of the company to an external, non-family buyer you would incur CGT on any gain. Finance Act 2015 introduced a 20% rate of CGT, for disposals o family businesses. This applies to gains up to a lifetime threshold of €1m. If the relief does not apply the rate would be the standard 33%. If the relief, the following illustrates the total CGT effect on the property disposal based on
- Current market value of €225,000
- Disposal at €300,000
|Company Gain on Property|
|Cost to company||225,000|
|Net proceeds after tax||275,250|
|Repay Directors Loan||225,000|
|Net Cash left in company||50,250|
|Tax on cash left in company||10,050|
|Total tax on disposal||34,800|
|Effective tax %||46.40%|
If the gain were extracted by distribution or salary the tax effect would be
|Tax Rate on extraction||51%|
|Tax on cash left in company||25,628|
|Total tax on disposal||50,378|
|Effective tax %||67.17%|
Future Exit Plans
If in the future you disposed of your shares in the company while the building was held by it you would avoid the double hit to CGT outlined above. This would also be the case if the company were liquidated.
This is a relief which can apply to exempt from CGT a gain on the disposal of a family company where the owner is over fifty-five provided certain conditions are met. Detailed consideration of these conditions is beyond the scope of this analysis. However, a key feature of the relief is that there is a lifetime threshold for the disposal of qualifying business assets which is
- €750,000 where the disposal is outside the family. This reduces to €500,000 where the owner is over sixty-six years old
- No limit where the disposal is to your children. This reduces to €3,000,000 where the owner is over sixty-six years old
At current valuations the company shares would exceed the threshold for the relief. However, if the business were passing within the family the relief could be available. Therefore it is worth considering if the relief could apply to the property.
The relief can apply to a property used by the business. There is ambiguity about Revenue’s position when the property is rented to the business. It is normally advisable to get Revenue clearance in these situations.
If the property were owned by the company the relief would certainly apply but this goes against your original plan to retain the property as an asset for retirement.
Transfer to a new company
If the property were transferred to a new company which then rented it to your trading company you could avoid he exposure to any double hit to CGT on a future disposal. This would operate as follows
- Set up new company
- Transfer property and outstanding loan to new company
- The new company rents the property to the trading company
- Rental payments are used to pay off the bank loan
- If you wished to dispose of the property you would actually sell the shares in the new company. CGT would be chargeable on the gain on the shares in the company. However, as the bank loan is also going into the company the base value of the shares will be low and thus the gain on the shares would give a high CGT liability.
- Later re-organisation to new company
Once the loan was paid off the existing company could be re-organised to leave the premises in it and transfer the trade to a new company. Sale of the shares in the new company would have a base cost of the property market value on transfer.
Surcharges on rental income
If a new company is used it would be a close company for Corporation Tax. As such it would be liable to surcharges of 15% of undistributed income. This would happen when the interest element of the bank payments reduced leaving a book profit but no cash.
Having reviewed the use of a second company, the pros and cons are as follows
1. On the plus side it could avoid a double hit to CGT
2. The downsides are
a. Surcharges on rental income
b. Later re-organisations involve restructuring the trade. Given the lower value of the property compared to the trade this could be a case of the tail wagging the dog.
Once the bank loan was reapid you could restructure the company to separate the trade and the property. This would use CGT restructuring provisions to avoid creating CGT liabilities. To qualify for these reliefs the transaction must be for a bona fide commercial reason and the sole or main reasons must not be the avoidance of tax.
In your case the objective of holding on to the property as a source of retirement income would, in my view, serve as a bona fide commercial reason.
Consideration in excess of market value
If the company pays in excess of market value for the property, the excess would be considered to be a distribution to you rather than a capital payment. As such, it would be liable to Income Tax, PRSI and USC at your marginal rates. For example, this would occur if the consideration was €250,000 while the market value was €225,000.
If this occurred the company would also be liable to pay Dividend Withholding Tax of 20% of the gross dividend by the fourteenth day of the month following the transaction. This tax would be offset against your personal liability.
At present you are taxed on your rental profit from the property. This is computed as
Gross Rent from letting
Less Loan Interest on Mortgage
As the loan capital repayments increase this taxable amount increases. This means that you may need to extract cash at marginal tax rates to meet capital payments
If the property is transferred to the company the company will
1. No longer pay rent
2. Claim a deduction for the mortgage interest
If you wish to extract income from the company to replace this it would be by either salary or distribution, either of which will be taxable at your marginal rate.
However, there would be a reduced tax cost through not having to extract taxable income to pay bank capital.
Duty would be payable at 2% of the property’s market value at date of transfer.
At present VAT is not being charged on the lease which was a short lease of 10 years created in 2010. VAT is not being charged. The purchase of the property in 2006 included VAT of €45,000 being a VAT inclusive price of €380,000 including VAT.
If VAT had been charged on the lease an element of this VAT could have been reclaimed. The option to charge VAT on a lease lies with the landlord. When the parties are connected, as in this case, the option is only permitted when the tenant has a least 90% VAT deductibility. If the company has over 90% deductibility. Using this option could trigger a partial reclaim if the VAT charged on the original purchase. As this was ten years ago the reclaim would be
VAT charged * 11/20
VAT effect of transfer to company
There is a joint option to charge VAT on the transfer of a freehold interest which would otherwise be exempt. However, recent Revenue guidelines apply an exemption known as Transfer of Business Exemption to the transfer of properties which are or have been let. This deems the transfer not to be a supply and so rules out the option to charge VAT on the transaction. Therefore the transfer to the company could rule out any possibility of generating a VAT reclaim.
This aspect can be discussed further if details of the original VAT treatments are available.
Summary and conclusion
The transfer of the property into the company would create a CGT loss if done at current market value. This loss would be ring-fenced against future gains in a transaction between you and your company.
Repayment of bank capital would incur less tax cost.
The transfer would restrict your ability to use the property as part of your retirement planning
Future restructuring could be used to separate the property and the trading company provided there were genuine non-tax commercial justifications
The transfer would remove the option to charge VAT on the letting of the property
The gift from your father seems a straightforward option bur we need full information on the CAT element of the transfer of the business to you to conclude the analysis of this.