Key Post Key Post: Buying premises through the company or personally?

It is very clear that you should buy the property in your own name and let it to the company. Despite this, people often use a company to buy their premises or investment property and it causes huge tax and other headaches.

If the company buys the property…
Cost of property €1m
Funded by interest only loan of €1m
Interest paid on loan – say €50,000 per year.

If the owner buys it and rents it to the company…
Company pays rent of €50,000 to owner.
Owner pays €50,000 interest.
No profit, so no income tax.

In 5 years, the company moves premises and sells the property for €2m.
The company pays 20% CGT on the profits so has retained profits of €800k.
The owner will pay income tax and prsi of 46.5% on this €800k when taking it out of the company, so they will be left with net cash after tax of €428k.

If the owner sells property owned personally, he will have €800k in his hands after paying 20% CGT.

The false argument which is advanced for buying a property through a company goes as follows. Corporation Tax is only 12.5% while income tax and PRSI is 46%, so you are better off leaving money in the company and buying the office that way. This post explains why this argument is false and why you are better off taking your money out of a company as either a pension or as salary instead of leaving it to accumulate in the company. This applies whether you buy an office or not.

The only exception I can think of would be a speculative property development where there might be business and tax reasons to have a company developing the property.

There are other tax reasons for buying it personally

If you have make losses on the property or on other assets, you can set them off against each other for CGT purposes.

If you retain the property until you die, you will pay no CGT on its disposal. While you may retain the company until you die, this is less likely as you will probably have wound it up or sold it on retirement.

There are other business reasons for buying the property directly...

It gives a truer picture of the performance of the company if they are paying a market rent for their premises. Occasionally a company owns a property which they have paid for and so there is no rent charge. The company appears more profitable than it really is.

If an employee gets a profit share, they will be getting a share of profits generated by the business, rather than by its property holding.

If the owner wants to give share options to employees, he will be giving options in a business rather than in a property.

If the company gets into financial difficulty, the property will not be at risk.

If the owner wants to sell the business, he will have more buyers of a company without a property as the new owners will not need to borrow so much. They might also not want the headache of owning a property especially if they are merging the acquired business.

If the owner wants to borrow money for something else at a later stage, he will have a property to provide as security. He could only give a property owned by the company as security, if the company was borrowing the money.

If he wants to leave his assets to his family and some work in the business and some don't. He can leave the property to those who don't work in the business who can collect a rent from the business.

Owning a property in the company increases the chances that the company's assets will exceed €3.65m and they will lose their audit exemption.

Great post. I know somone who would have saved a fortune had they known the above some years ago. Instead they heeded their accountants advice and bought the business property in the name of their limited company. Big big mistake. Now they have a valuable property owned by their limited company, but would cost a fortune in taxes to get the money out....which they could do with. Of course the accountants do not care they gave bad advice anyway. All they seem interested in is charging big fees.

That does seem bad advice. There is also the matter of a surcharge of 20% on the undistributed Rental Income in a Company increasing the effective tax rate from 12.5% anyway.

Brendan said:

As the assets will be lower, it might help to gain an audit exemption.( I am not sure about this.)

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It will if it helps decrease the Balance Sheet Value below €3.65m.

The conditions to be satisfied before a company will be able to claim the exemption from the requirement to have its accounts audited are set out in section 32(3) of the 1999 Act and are as follows:
In respect of the financial year concerned:

• The company must be a company to which the Companies (Amendment) Act 1986 applies;
• The amount of turnover of the company must not exceed €7.3 million;
• The assets of the company are less than €3.65 million at the end of its financial year;
• The average number of employees must not exceed 50;
• The company must not be a parent company or a subsidiary company;
• The company must not come within one of 19 classes of companies listed in the Second Schedule to the 1999 Act;
• The company's annual return must be furnished to the CRO in compliance with section 127 Companies Act 1963. This means that the return must be delivered to the CRO not later than 28 days after the company's Annual Return Date, or where the return has been made up to an earlier date, within 28 days of that earlier date.

Unless the financial year in respect of which the audit exemption is being claimed is the first financial year of the company, the company must also have satisfied all the conditions set out in section 32(3) in respect of the preceding financial year. For instance, if the company's annual return was delivered late to the CRO either the previous year or if the current years return is being delivered late, the company is not entitled to the audit exemption, notwithstanding that it may satisfy all the remaining conditions.

Possibe audit exemption is only one of the other possible benefits of heeding the original posters advice "It is very clear that you should buy the property in your own name and let it to the company. Despite this, people often use a company to buy their premises or investment property and it causes huge tax and other headaches." If only an accountant I know had given that advice years ago to a friend of mine it would have saved them a fortune - instead the accountant gave the opposite advice, to buy the property through the company. This proved to be very expensive advice indeed.

Thanks Triple A, I have updated the post on the audit exemption issue.

I have drawn the attention of the post to two people whose professional opinion I respect, and they say that it is not as clear cut as I make it out to be. So I welcome examples of where it might make sense to buy a property through a company.

TripleA said:

There is also the matter of a surcharge of 20% on the undistributed Rental Income in a Company increasing the effective tax rate from 12.5% anyway.

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Triple A -Yes, but this post is about buying a premises for a company, as distinct from buying a premises for investment purposes. So there won't be rental income, unless the company moves premises and lets out the original.

Buying an investment property through a company is probably even worse.

We are starting a process where we are inviting informed posters to update Key Posts. Would you like to tackle the subject of buying an investment property through a company? It might be useful to use this thread as a template, but that is up to you. There is a Key Post here but it needs to be updated:

http://www.askaboutmoney.com/showthread.php?t=6222

I will now deal in more detail with the argument of buying through a company.

If a profitable trading company retains €1,142,000 in profits in the company (over a period of years - not necessarily in one year) , it will pay €142,000 in tax leaving it with €1m to buy the property.

The same company would have to pay €1,850,000 in profits as salary to a proprietary director for him to get €1m into his hand. (€1.85m less 46% tax = €1m)

So if you want to accumulate assets quickly you buy through the company.

I don’t agree with this argument. While it is arithmetically correct, and “you” will own the property quicker this way, of course the “you” is the company and not the individual. When the owner seeks to sell the property or the company after ten years, they will be kicking themselves, and probably their advisors, for not taking the smaller tax hit upfront.

Another way of looking at this is that if you finance the acquisition with an interest only loan, you never have to pay for the property.


I suppose if your first and only priority was to accumulate a vast amount of property quickly, then you could do this quicker through a profitable trading company. But this is not a financially sound objective.


Brendan

Brendan said:

I will now deal in more detail with the argument of buying through a company...

...I don’t agree with this argument.

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Brendan, this is not an argument. Of course buying personally is a far better option than via a company.

This will be the cases in 90%-95% of situations. In such cases it makes perfect sense to buy a property personally.

That said, in a minority of situations (maybe 5-10%, maybe less, eg where there is a restrictive level of bank finance available to finance the deal) it can make sense to buy through a company. In the latter circumstances, buying personally can turn out to be a reckless and foolish decision, and can leave the owners losing their property if they cannot juggle the higher short-term tax costs. I have seen this happen.

I'm not sure if your "one size fits all" prescription suits all cases. If you doubt me, talk to a few other professionals who advise small businesses on an ongoing basis.

Thanks Ubi

I am finding it difficult to envisage a situation where buying personally would be reckless and buying through a company would not be.

It would be reckless to buy a property if your income was not sufficient to cover the repayments. However, if you have the profits in the company, surely you should just pay them out as salary and increase your income?

If the company is not very profitable, then presumably it makes no sense to buy through a company.

Brendan

"I don’t agree with this argument. While it is arithmetically correct, and “you” will own the property quicker this way, of course the “you” is the company and not the individual. When the owner seeks to sell the property or the company after ten years, they will be kicking themselves, and probably their advisors, for not taking the smaller tax hit upfront."

I have been trying to think of a 'textbook' example of where it might definitely make more sense to buy the property through the company. Quarry land is, I think, probably the answer. You buy it dear, being valued on the tonnage of sand\gravel. You then exhaust the resource over 10-20 years, so the capital asset is going down in value. The possible future sale of the property does not figure very highly at all in your investment decision.

I think there are probably many other businesses where the owner likewise will not view the future sale of the property as being a significant factor in his\her decision making process. It is probably on this issue that the decision depends.

Brendan said:

I am finding it difficult to envisage a situation where buying personally would be reckless and buying through a company would not be.

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Why? The example I have given you should illustrate my point.

If the company is certain that they can earn €1,850,000 in profits in a given repayment period, then they can do what they wish. They should clearly buy personally.

If they are certain that they can earn €1,142,000 in profits but unsure whether they can reach profits of €1,850,000, then they may be able to afford the property by buying through a company but unable to afford it if they buy in the directors names.

If they cannot afford to buy the property personally, but they can afford to do so through the company, then buying through the company should be the way to go.

At worst it (usually) should remain a better option than renting.

Hi Guys

I hope I'm not going to be eaten up by the sharks here.............

I can certainly see where Brendan is coming from and i think its a good idea to structure this type of property deal on a personal basis where possible however there are other efficient exit mechanisms surely and other considerations.

For example if I had a small company which included a valuable property among its assets, theres always an option at say retirement to :
a) sell the shares of the company including the property which will trigger a capital gaiuns tax on the shares only.
b) sell the business separately leaving the property behind in the company and then sell the shares of the company as in a.
c) You might consider that its not always beneficial to have excessive assets held personally when planning for the passing on of your estate eg there are specific reliefs for passing on businesses which should be considered especially if your "inheritees" are likely to exceed CAT Threshholds.It might be better to have the property held in the company for this reason depending on your circumstances
d) I believe Brendan's analysis assumes that the value of the property will increase above and beyond inflation. It may not do so.
The time value of money needs to be taken into the analysis.
e) I certainly would not be happy to take 1 million of retained profits out of a company just for the sake of purchasing a property personally. You are just wiping out your capital with tax. Your wealth is weakened at this point regardless of what you say

My biggest fear actually of keeping a property within the company would be that my creditors would have a call on it if my business were to fail

rabbit said:

I know somone who would have saved a fortune had they known the above some years ago. Instead they heeded their accountants advice and bought the business property in the name of their limited company.

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rabbit said:

If only an accountant I know had given that advice years ago to a friend of mine it would have saved them a fortune - instead the accountant gave the opposite advice, to buy the property through the company.

rabbit said:

The proof of the pudding is that there are many people in Ireland - who bought property on the advice of their accountant years ago through their company ( one person I know was advised to form a company ) and who now find it was the wrong decision by a long shot, as to get their hands on the money they would have to pay a fortune in tax.

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I think we get the point. I deal with many small family companies as Rabbit has described and for them, I have not yet seen any circumstances that would justify putting the property into a company. However, as Ubiquitous has said, that is not to say there are NO circumstances where it could apply. Each person making a decision must, look at all of the circumstances surrounding that decision and proceed as they see best.

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Importer, don't be worried by the sharks. The point about such Key Posts is that such arguments can be dealt with.

I can't understand why anyone buys a business through a company. Your post leads me to understand some of the arguments they make. However, I don't agree with any of them.

a) sell the shares of the company including the property which will trigger a capital gaiuns tax on the shares only.

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Yes. But the person who buys the company, may not want the property. Whether they want the property or not, they will make an allowance for the CGT on the unrealised gain.

b) sell the business separately leaving the property behind in the company and then sell the shares of the company as in a.

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The company sells the business and ends up with a load of cash in the company. No investor will want to buy a company with a property worth €1m and €1m in cash.

c) You might consider that its not always beneficial to have excessive assets held personally when planning for the passing on of your estate eg there are specific reliefs for passing on businesses which should be considered especially if your "inheritees" are likely to exceed CAT Threshholds.It might be better to have the property held in the company for this reason depending on your circumstances

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If the property is used for the purposes of running the business, I think that business relief applies? I am open to correction on this. I think that the advantage of the CGT liability evaporating on death, probably outweighs such considerations.

d) I believe Brendan's analysis assumes that the value of the property will increase above and beyond inflation. It may not do so.
The time value of money needs to be taken into the analysis.

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CGT doesn't allow for inflation. So I am not sure it's relevant. CGT will be applied to the nominal increase in value. Most real assets do increase in value over time.

I suppose if there was deflation, one might be better off buying through a company. But if you expect deflation, rent and don't buy.

e) I certainly would not be happy to take 1 million of retained profits out of a company just for the sake of purchasing a property personally. You are just wiping out your capital with tax. Your wealth is weakened at this point regardless of what you say

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Sorry, it is not "regardless of what I say". Forget about property for a moment. I am personally richer with €1m in cash in my own bank account, than having €1.6m in my company.

The failure to separate out the person from the company leads to a lot of wrong conclusions.

My biggest fear actually of keeping a property within the company would be that my creditors would have a call on it if my business were to fail

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This should be a concern but should not be your biggest fear. You should not keep huge amounts of cash or assets in a company as it will discourage you from taking remedial action if your business goes downhill. If you expect temporary losses, there is no harm in leaving some profits and cash in the company to tide you over. However, if you are on a long term losing trend, you should quit the business.

Brendan

Hi Brendan

I enjoyed your answer but I don't agree with it.

Take the situation of selling the "business" first separate to the property.
We have done this a number of times in the past and it can be managed by preparing the balance sheet for sale. This might involve making hefty contributions to pension schemes so that you end up with a situation where the business being "sold" has a nominal price, a formula along the lines of assets + goodwill = liabilities. Nothing or little is paid by the new buyer but the buyer is taking on net liabilities. Anyhow Im sure you're more aufait with this than me. The idea then is to be left with the property on its own which can be sold in the company wrapper. Certainly the best way.

I doubt that property being rented to a company qualifies for business relief. But yes that would have to be checked.

Its true that CGT no longer makes allowances for inflation now that the indexation has been removed but this is not the be all and the end all.
Personally I think its a little bit extreme to advise anyone to take large chunks of capital out of their business at a tax cost of some 41% to purchase a property. This makes sense of course if you can be sure the property will significantly rise in value in the future, It makes sense if you can be sure that the business is stable and will last beyond the next few years. However I dont think you can be sure of that always or ever.

Let me offer you another scenario as follows :
I purchase a property within the company for one million euro. Next year my world falls apart and I need to liquidate everything I own. I sell the property within the company for 1.1million. I pay 20,000 capital gains tax. I then liquidate the company and pay 20% tax on 1.08 million, leaving me with 864,000 in my pocket. (20% tax is paid on accumulated profits of a company being liquidated)

In your example I would have paid 400,000 tax (roughly) getting the money out of the company. Id have had to borrow 400,000 to buy the property. I'd have sold the property one year later for 1.1 million. I would have paid 20,000 CGT leaving me with 1.08 million. I then repay the bank 420,000 (including interest) leaving me with 660,000.

In my book Id prefer to have 864,000 than 660,000.
If I had taken your advice, Id be 204,000 worse off in my pocket. And that "my" is my pocket, not the companys.

Im not an accountant so shoot away..................

Brendan

I missed one point there..................

You say that in the event of a property being sold in a company wrapper that the unrealised gain / potential CGT liability will be reflected in the purchase price.

In my experience thats not so true, In fact the buyer benefits by paying a lesser stamp duty on the purchase of the company shares than he would if he were paying stamp duty on the property directly. As you know the rates of stamp duty are significantly less for stamping share transactions than property deeds. The savings can be really substantial.

As I said earlier, I would be very cautious of extracting funds from companies at 41% tax rate just to purchase property personally.
My own tax adviser is adamant hat tax should only ever be paid at 20%. and where ever possible its better to pay capital gains tax than income tax. My own judgement too is that with good tax planning and structuring there is sufficient manoeveribility in the tax law to avoid the 41% most of the time

Hi Importer

Your example is artificial. If you are selling it one year later, you should not be buying a property anyway because of the 9% stamp duty.

Your example is not about property - it is about how to take money out of a company. See the separate Key Post on that.

Your example is incorrect in any event. Where did the €1m come from to buy the property? You must have had taxable profits of €1.14m to keep €1m in the company.

So if you are planning to liquidate your company next year, your correct strategy may be that you should leave the profits in the company and pay 12.5% CT on them. Then pay 20% CGT on the disposal. You certainly should not buy a property.

If you are not planning to liquidate in the next year, it's not worth leaving the cash there as you will be getting hit for further Corporation Tax and Investment Income surcharges to make things worse.

Mostly when we buy property, we assume that it will rise in value before we dispose of it. If it falls in value, you are probably better off to have in your own name so that you can set the losses against other gains for CGT purposes.

Hi Importer

Nothing or little is paid by the new buyer but the buyer is taking on net liabilities. Anyhow Im sure you're more aufait with this than me.

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I am certainly not au fait with this.

It seems that you are setting up businesses. Buying properties. Selling off the businesses for nothing. And disposing of the properties within companies.


Brendan

OK we can change the example if you wish. Maybe the 1 year thing is throwing you off.Lets change it so that the property is retained for seven years

And yes the company has retained earnings in the company of well over 1 million when it decides to buy the property initially.

The property is purchased for 1 million and retained for seven years when it is sold for 1.4million. The company is then liquidated immediately after.

Its still much much better to hold the property in the company in this type of scenario.

By the way this posting is not about "getting money out of companies" It is about preserving and growing wealth" which is the objective.

Its definitely not correct to say that its nearly always better to hold property personally. All I can tell you is that's not the view of my advisers.
It's not my view. That is why I feel I have to reply to this

Example
a)Property Purchased by company , 1 million, sold seven years later for 1.4million, gain 400,000, Capital gain tax 80,000 leaving 1.32million to distribute on voluntary wind up of company. Shareholders receive 1.056 million after tax of 20%

b) 1 million taken out of company, tax paid at say 40% leaving 600,000 available to shareholder who purchases property for 1 million with interest only loan of 400,000. Property is sold after seven years realising 1.4 million, CGT 80,000, leaving net proceeds from sale of 1.32 million.
Bank loan is repaid 400,000 + 140,000 interest leaving the shareholder 780,000

Sorry my figures are a bit crude but surely you can see the disasterous effects of paying 40% income tax withdrawing the funds from the company. In this seven year period you would be once again 276,000 worse off by purchasing the property personally