Key Post: VAT on property - interest free loan?

In order to avoid charging vat on existing rental income the new house could be bought under a different legal entity i.e. if the existing house is in own name buy the new house under self and spouses name (a partnership!). Income tax could also be saved. If you have a rental profit and hopefully you will at some time the fact that the vat will be deducted from the rent received before computing your rental profit will ensure that you have less income and a lower profit. You therefore also save tax at 46% of the VAT amount (aproximately 10% of the net rent). Example

400k house, 10k fit out. 3k legal fees. Loan 100k Annual interest 4.5k Vat reclaim in period one 49,833

Rent €1,000 per month. VAT charge from commencement of rent monthly vat bill of €174 to be paid to revenue.

Income tax assuming all at marginal rate
Vat rgd Non Vat Rgt
Rent net of vat 9,917 12,000
Interest 4,500 4,500
Expenses -say 1,000 1,000
Capital allowances 1,033 1,250
Taxable profit 3,384 5,250
Tax at 46% 1,557 2,415

Saving of €858. This pays back almost 41% of the vat to be repaid. So not alone do we have a timing difference we also have a tax saving!!

Comments please.
 
Fully agree with the above. VAT recalim has 2 advantages
1. Receipt of a lump sum rebate-which can be put on deposit to earn interest or invest in equites if risk not a problem. Possiblility to earn a nice return.
2. A tax break on your rental income income-thus reducing taxable profit.

Draw back? Calculating VAT due on rent, and making bi-monthly VAT return and Annual return. All can be done easily on Rev on line. No need to engage expensive tax consultants. If your position changes before full amount repaid- you just de-register and pay back outstanding amount. Then you are back to normal status and can sell property without having to return VAT from the sale amount.
 
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