# Buying a residential property through a company



## oaky8 (12 Jul 2005)

i am a director of a cash rich company and have recently purchased a 5 bed residential house for the company for 260k can i claim any vat back off this property price for the company or is this not allowed .


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## Brendan Burgess (12 Jul 2005)

*Re: VAT on company investment property*

Hi oaky

I don't know if you are allowed to claim VAT back. If you can claim it back, you must charge VAT on the rent. If the company is registered for VAT, you may be obliged to charge VAT on the rent and then you can certainly claim the VAT back. 

Did you take professional advice before you bought the house? I find it very difficult to see any possible scenario when it would make sense to buy a residential property through a company.

Brendan


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## GreatDane (12 Jul 2005)

*Re: VAT on company investment property*

Hi Brendan

Perhaps oaky found him/herself in the position where all available cash was in the company name & extracting it would result in paye / prsi being paid on it etc 

Hi oaky
I hope you've considered maxing your pension contributions etc if your company is cash rich 

Cheers

G>


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## oaky8 (13 Jul 2005)

*Re: VAT on company investment property*

thanks for the replies brendan and garrettod

to brendan. the current scenario is the house cost 260k off the plans and are now selling for 330k so the company should be happy with that investment.

to garrettod . i have no time for pensions so thought this was a better investment for the compay . 


i intend to rent this house on behalf of the company at the current market value . for example if the current market value is 605 per month that would mean i would charge 500 plus vat which is 605 . correct me if i'm wrong but then i would be paying back 105 per month to the revenue ( i think vat is 21% on rent ) i understand then the company would be getting 605 x 12 a year for rent and would be taxed aswell on this ... but vat of 13.5 on 260k would be nice to get if it can be got . 

please advise.

ps. wondering did you all see mondays independant question of the week thats where i seen all this vat on property malarky . i thought it was worth looking into and i have also emailed my accountant this article..


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## stuart (13 Jul 2005)

*Re: VAT on company investment property*

Registering for VAT on investment properties can be good but also can be a very big headache

If you have already exchanged on the property, then forget about it

It will not be back dated, even though you have a vat registration already
You would be required to make a declaration prior to purchasing the property

It depends on personal circumtsances whether VAT registration is beneficial or not
Future plans and existing investment properties are more important than anything else

I have gone though this process with a lot of clients and sometimes it just is not worth the hassle it will cause (for them)
Other times it can help them save a lot of money and/or make further invesments

stuart@buyingtolet.ie
PS If you have not exchanged on the proeprty, as Brendan said, I would be very concerned with getting the title of the property in your personal name rather than the companies


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## oaky8 (14 Jul 2005)

*Re: VAT on company investment property*

thanks stuart for your reply


the house is costing 260k i the company has paid 10% deposit of 26k and the company is putting up another 84k so the company is borrowing 150k and then will be rented out at market value. its located in a very small village in wicklow so rent would be not as high as a big town. 

can u tell me am i too late or wasting my time on the vat issue. the sale will be completed in about two months. 

the company has also ploughed alot of extras into the house like fancy sanitary ware and tiles for the sole benefit of reclaiming the vat back . 

can anyone one tell me what they would do in this position

thanks again .


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## Brendan Burgess (14 Jul 2005)

*Re: VAT on company investment property*

Forget about VAT for the moment. It's a side issue.

As the sale has not closed, then you should sit down with your accountant and get all the reasons why you should not be buying this in the name of the company. If you have lots of cash in the company, you will have to pay tax on taking it out. But it's the right thing to do.  Buying a house is not the thing to do. 

Brendan


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## gongey (14 Jul 2005)

*Re: VAT on company investment property*

your problem with VAT is going to be finding suitable tenants. most will not be happy to have a hiked up price because of VAT @21% unless they themselves are VAT registerd and can claim it back. Particulary so if it's residential property, where tenants will most likely be non registered.

also from your own sake you're not really getting market rent if the price is inclusive of VAT.

as Brendan said, you need to be wary of the double charge to tax when you go to sell this property. you will pay CGT on the sale of the property which is fine, but the cash received goes into the company. trying to get that cash will also then be subject to tax at higher rates presumably if you take it as salary where the top rates will be paid.

all in all, it's not a wise move to go through the company and especially so if it's a residential property


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## ubiquitous (14 Jul 2005)

*Re: VAT on company investment property*

The double charge is one of many potential problems involved in using the company.
Others include:
- higher Corporation Tax & surcharge on rental income
- serious BIK problems if you ever want to live there or allow others to live there rent-free or at reduced rent
- complications if company ever goes into arrears with CRO or is struck off
- other company law complications
- danger that future revisions to VAT law or company law might create further difficulties for you.
Steer clear..


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## oaky8 (14 Jul 2005)

*Re: VAT on company investment property*

now i dont know what to do . i still think it is a good investment on the companys behalf it was bought for 260k and should realise for 400k in a few years i think . so i think i'll abandon the vat issues and buy in the companys name . 

anyone have any more advice.


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## gongey (14 Jul 2005)

*Re: VAT on company investment property*

oaky i don't think you're seeing the overall picture. Yes the VAT is messy and you shoudl stay clear. But what everyone here is trying to tell you is that as good an investment in monetary terms as it sounds on paper, i.e. buying for 260, selling for 400, of the profit of 140K which will be the company's profit, you will first have to pay CGT at 20% which is about 25k and then when you want to take the balance out (after paying CGT) you will have to pay more tax if you take the remaining 120K out as a salary or in some form or other, in this case at the higher rate of tax 42%plus PRSI 5%. so of that 120K you could expect to see just 60K!! Does i seem worthwhile now? Your initial profit of 140K is gone down to maybe just above 60K, thats too much tax in my eyes!

buy the place your self, extract some cash and get a mortgage. then at least you yourself have the rental income to yourself, you can re-invest in the company and then in 5 years when you go to sell the property the only tax paid then will be the CGT on the gain.

does anyone agree with me?


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## jayok (14 Jul 2005)

*Re: VAT on company investment property*

Hi Oaky8,

Bear with me on this lenghty reponse but I will answer your question:

Just to throw a spanner in the works I have bought a residential property in a company and I have good reasons for doing so. Let me give you a background on the deal:

I had a Ltd co that I used when a sole contractor in IT. I acculumated approx 90K in this ltd company and then suspended trading in it for another Ltd company, I used this 90K company to invest in the 2nd company and now the shares bought for 6k are worth 250k (after 4 years) so I cannot liquidate the original 90k company, etc without giving the taxman serious money. So there I was with 90k in a company that I could do little with besides pay tax. Banks were all drooling for the pension route with the money but because it wasn't trading the revenue were having none of it.

So still 90k in the co. Everything was going to nail me for tax so I viewed this as a part of a future pension. I bought a residential house in the company for 180K euro. Including fitting stamp, etc, it cost a total of €195k to buy (I kept 5k as a sink fund). I borrowed €110k in the company off the bank and completed the sale. The house is now rented and I am receiving a rental income of €8,400pa, less expenses, tax, etc, the rental return off the property is just above break-even. So techically I am not making money of this investment!  

BUT If I take the long term approach in 25 years time the company will own the house and all the rental income will be rental profits. Not adjusting the time value of inflation/money/rent, and assuming todays tax rates, etc I would be receiving in todays money into the company €8,400 less expenses so say there's €7,000 left. Tax for companys is current 25% (€1,750) leaving €5,250. Pay this via a dividend and I am liable for personal tax of 42% leaving €3,025 per annum net. Not a whole lot but in todays money it would cover the cost of my car loan. Again this is just a part of my pension portfilio but it means that it's a nice €254 per month.

Compare that to the option of paying a dividend now and having only 45k left to work with. In the longer term 25+ years the company can be more benefical, but only if held in the long term.

Aside from this unlike pensions fund when my time on this planet comes to an end, the kids can inherit my shareholding in this company (100%) and continue to receive the €254 from this fund (i.e. it doesn't die with me). 

I understand why you are buying in the company and equally I understand why everyone is suggesting that you buy personally. But can I point out to all those suggesting you buy personally that you may not simply have access to the financial resources without the company! People seem to forget that and this certainly was the case for me. If you can only do it with the company then yes, do it and take the hit, just be clear on the tax implications. Remember only 12.5% tax has been paid on this money before the purchase, this compares with 42% otherwise.

Anyhow, I just wanted to give you all a background. With regard to the original question on VAT. Do not claim VAT on anything to do with the purchase of the house it just gets complicated. Pay the VAT and essentially trade as a non-VAT registered company for this property. It will save sooo much hassle later on.

Jason.


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## RainyDay (14 Jul 2005)

*Re: VAT on company investment property*



			
				jayok said:
			
		

> Aside from this unlike pensions fund when my time on this planet comes to an end, the kids can inherit my shareholding in this company (100%) and continue to receive the €254 from this fund (i.e. it doesn't die with me).


Your pension assets do not die with you, unless you have converted all those assets into an annuity contract.


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## jayok (14 Jul 2005)

*Re: VAT on company investment property*

Agreed, I wasn't clear initially, but I would like to have an Annuity as part of my pension portfolio anyway so that would die. If I can minimise the amount that's lost then all the better


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## RainyDay (14 Jul 2005)

*Re: VAT on company investment property*

This may be stating the obvious, but if you want to minimise the amount lost on death, don't buy an annuity at all. Of course, if you make this decision, you miss out on the benefit of the annuity which gives you a guaranteed fixed income for life, whether you life to be 68 or 108.


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## jayok (14 Jul 2005)

*Re: VAT on company investment property*

Absolutely, but with the property structure below, the return will be there, no matter whether I live or die. Wow, morbid stuff


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## oaky8 (14 Jul 2005)

*Re: VAT on company investment property*

jayok you have been a big help to me i understand everything much better now and it makes me feel that i am doing the right thing. so i'm going to let the company buy the house. 

thanks again .


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## jayok (14 Jul 2005)

*Re: VAT on company investment property*

Glad to be of help oaky! Just cause its not mainstream it doesn't meant that it is not right for you  

Remember, though, the usual, I'm *not* an expert, consultant professionals, etc, warnings apply. My situation was best for me make sure it's best for you.

Anyhow, best of luck with the purchase.


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## Brendan Burgess (14 Jul 2005)

*Re: VAT on company investment property*

Hi jayok

Your system does not make much sense. You add up the numbers and they seem to work out very well, so you assume you are doing the right thing. But you can do the exact same thing personally. You should compare both and you will see that you would be a lot better off doing it personally. 

You have 90k in the company. Pay it to yourself and you have 45k. So now, you have to borrow an additional 45k. In exchange for this, you save yourself the 25% corporation tax on the rental income and the double hit to Capital Gains Tax. 



> I am concerned at expressions such as The house is now rented and I am receiving a rental income of €8,400pa, less expenses, tax, etc, the rental return off the property is just above break-even. So techically I am not making money of this investment!



You are confusing the personal "I" with the corporate entity.

Brendan


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## jayok (14 Jul 2005)

*Re: VAT on company investment property*

Hi Brendan,


You are right, I use the expression "I" instead of the correct term "the company" and it should read the company only. The only place for "I" is with regard to dividends. But I do not believe that I am confusing the taxes.


With regard to the pay 45K in tax and then use 45K to buy the house I agree this appears to be the better route - if you have the financial resources to do this. Lets look at the examples.


By borrowing an extra 45K from the bank the loan on the property will be €155k or €735 per month for 25 years. Given that I am only receiving €700 I would have to make up the shortfall plus the other expenses to make it match. There's a while here before I make up the 45K I've given the tax man (by dividend payment) 


Ok, let's take simple figures so see if I understand this (I am going to ignore the time value of money for the purpose of demonstration and assume today's money and there's serious simplification of the interest charges from the banks!)


Some Fundamental Figures:
--------------------------

Initial Cost (for CGT) = 185k
Initial Expenses = €10k
Total Initial Cost = 195k
Assume Final Value (at 3% growth in property pa) = €387,500 (approx)
Capital Gain = €202,500

Rent Received over 25 years (assuming no increase) 300 months * €700 = €210,000 
House Expenses = €20,000 

Mortgage Interest on €110k over 25 years (at 3% APR) = €46,500
Mortgage Interest on €155k over 25 years (at 3% APR) = €65,500


Ok, there's been some simplification here I am excluding depreciation (tax deductable) and other things but you get the idea.


1. Purchase in Company
----------------------

At year 25:

Rent Received = €210,000
Less Mortgage Interest = €46,500
Less Other Expenses = €20,000
Total Taxable = €143,500 @ 25%
Retained Profit over 25 year period = €107,625
(Ok shortage of €2,375 for principal but this amount comes from other tax deducations, remember we just break even on this)

Sell the House for €387,500
CGT is 20% of €202,500 = €40,500
Still Owe Bank €3k, so pay bank and CGT then
Cash in company = €344,000

Liquidate company and pay 20% of €344,000 which is €68,800
Therefore personal wealth: €275,200


2. Purchase Personally
----------------------

Rent Received = €210,000
Less Mortgage Interest = €65,500
Less Other Expenses = €20,000
Total Taxable = €124,500 @ 48% (PAYE / PRSI)
Retained Profit over 25 year period = €64,740
Short approx €90,000 for bank principal so we have to put 90k personal into the house to maintain it

Sell the House for €387,500
CGT is 20% of 202,500 = €40,500
Return the €90,000 that was put in personally to maintain it

Personal Wealth = 387,500 - 40,500 (CGT) - 90,000 (Personal Funds) = €257,000

So the difference between the two is that in the company the investment ticks over and covers its costs almost. In option 2 you have to contribute almost €90k additionally to meet the repayments. But this is not a problem as this €90k would be returned when the property is sold (you are of course losing any return on the 90k from elsewhere, but we will be nice and ignore this  ) Long-term you are €18k better off with the company in this model.

These figures look far better and are far more detailed in an Excel readsheet that on this board, but hopefully they throw some light on the planning done.

I should point this model only works with a cash-rich company where the LTV rate of the purchase is low. 

Actually I covered this before on the old AAM board and we came to the same conclusion then, if only I could find those old records!

Jason


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## stuart (15 Jul 2005)

*Re: VAT on company investment property*

There are other issues that need to be considered in addition to the purely mathemtical ones

If you intend investing in property further, would it be personally or inthe nameof the company?
Have you considered keeping the property once the 25 year period is over?
What if you decide to sell up earlier, how will this effect your tax?

But in your case have you accounted for the company surcharge on undistributed investment income at 20%, ie €107,625 @ 20% is €21,525

This would wipe out the gain you have calculated

There are likely to be substantial costs in your situation for accounting/udit fees


stuart@buyingtolet.ie


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## Brendan Burgess (16 Jul 2005)

*Re: VAT on company investment property*

Let's make the conclusion absolutely clear at this stage for those who don't have time to go through the figures.

*It makes no sense, financial or otherwise, for a company to buy a property. It is always better for an individual to do so in his or her own name. *

This is the conclusion of three qualified accountants - Ubi, Stuart and myself. It is also the belief of every other accountant I have met. 

I don't follow your figures and assumptions Jason, and I don't have the time to do the exercize again. But when anyone has done this and has had their figures checked, it works out better to buy the house personally.

Some problems with your assumptions:
You don't appear to have allowed for Surcharge on Rental income as Stuart has pointed out.
You charge 47% on taking the cash out now, but only 20% on the CGT in 25 years time. 
You make no allowance for the possibility that CGT may well be higher in 25 years time. Yes, it could also be lower. 
If you die during the 25 years, there would be no CGT on the disposal of the house if it's in your name.
Your rental income on the house will exceed your mortgage interest at some stage. If it's in the company it's going to get hammered for tax, or you will have to pay it out as salary. 
You don't appear to have allowed for the costs of running a company and the costs of liquidating a company which owns a property. 
You assume that the interest rate charged to a company and an individual will be the same - 3%. I would think that an individual would have more scope for getting a better deal. 
If you want to gift it to a child or friend at some later stage, they will probably not be able to avail of the reliefs available on inter-family gifts. 

*But let's say that you can deal with all these assumptions...*

You are still better off by only 18k. Is it worth all the hassle? 

I very much doubt it. 
Owning a property in your own name is very flexible. 
You can add your wife's name to it at a later stage if you want to . 
After a few years you will have good equity, so you will be able to borrow against it easily. 
You will probably get more favourable treatment in any court case or rental arbitration as an individual rather than a company.
You can let your kids or friends move into it rent-free and not incur a BIK problem. 

Just in case anyone is in any doubt...

*It makes no sense, financial or otherwise, for a company to buy a property. It is always better for an individual to do so in his or her own name. *


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## oaky8 (17 Jul 2005)

thanks brendan i'm now leaning to your way of thinking . it does make more sense alright.


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## oaky8 (18 Jul 2005)

i want to withdraw say 80k from the company . how much tax will i have to pay to get this . (is it 47% or less) and do i have to pay this tax straight away or at the end of the year.


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## stuart (18 Jul 2005)

The tax should be at 47% if you are a high rate tax payer (42% tax and 5% PRSI)

That is €37,600

You should consider borrowing the money, i.e increase the amount of the mortgage

There would be no tax to pay, but additional interest each year
Currently it would cost around €2,800 pa (80k @3.5%)

Another option could be to set up a SSAPS (small self-administered pension scheme)
This is a very specialised areas and professional advice should be sought
But it can be a very tax efficient way of releasing cash from a company for property investment (long term)

stuart@buyingtolet.ie


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## Brendan Burgess (18 Jul 2005)

I think it's worth looking at the  SSAP option, but I don't think it would work in this case as the company already has the money and so would not get tax relief on paying it out. The best thing would appear to be to pay it to yourself and suffer the hit. If you are investing it in a property, you will simply have to borrow a bit more to fund the property. 

Brendan


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## oaky8 (18 Jul 2005)

thanks for the quick response 
i am a high rate tax payer but when would i have to pay this tax . immediately or at end of tax year

thanks again


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## Brendan Burgess (19 Jul 2005)

As a director, you are subject to PAYE like anyone else. You pay the tax when you pay yourself a salary. 

Brendan


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## oaky8 (20 Jul 2005)

Was with my solicitor today and have put the house in my own name . it should be all signed up in september. thanks to all for the great advice especially brendan . keep up the good work..


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## Brendan Burgess (20 Jul 2005)

Hi oaky

Well done. It's nice to hear someone getting good information on Askaboutmoney and making a better decision as a result of it.

Brendan


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