tourism rental - business loan advice

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helvetica

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Hi, I'll try to keep this succinct!
Looking for advice on the best approach to a new venture my wife and I are starting on.
We have an 18th century coach house, which we want to turn into two, 2-bed houses.
Kildare County Council will not allow it for resi use, so we have to get commercial planning as a tourist short-term rental, which is fine.
So as it's commercial, we cannot get a mortgage, and we won't qualify for the derelict property grant, or SEAI grant, which is unfortunate!

I have been advised to apply for a business loan in our own names, then setup a company which will lease the property from us. The company would run the tourism rental business, obviously, and the financial benefit is that the interest on the loan can go against income tax. Is that all correct, and good advice?

We may qualify for a rural development grant, but even if we do, they don't release the funds until the development is turn-key. We have around half of the total development money cash-on-hand, so we need a business loan for the rest, or at least a small business loan, and a bridging loan for the grant money if we get it. Can anyone advise who are the best lenders in this space? Microfinance Ireland can offer up to €50k. Some of the non-traditional banks have minimum loan amounts higher than we need. Is it just AIB, BOI, and PTSB?

Any advice at all would be greatly appreciated. I'm writing a business plan at the moment and there are a lot of threads to pull together. Before I convince a bank it's a good idea, I have to convince my wife and myself! Cheers
 
Moved to AskAboutBusiness as the subject matter is more one of finance than rental accommodation. Might be wise to edit the thread title to better reflect the ask.
 
helvetica said:
I have been advised to apply for a business loan in our own names, then setup a company which will lease the property from us. The company would run the tourism rental business, obviously, and the financial benefit is that the interest on the loan can go against income tax. Is that all correct, and good advice?
Click to expand...

I am not a tax expert.

I don't see what setting up a company achieves, other than complexity.

If you get a business loan and develop the property as a commercial venture, you can write the interest against the profits from the business.

If you set up a company and lease it to the company, then you can write the interest off against the lease income. So I don't see any difference.

Did you get that advice in writing? I suspect you misunderstood it.

Brendan
 
If the business is operated through a company it has limited liability in the event of any claims against it etc. so there's that aspect.

It may also be envisaged to run the business in such a way as to (try to) fall within the 12.5% CT rate, as opposed to paying marginal income tax rates.

Pension is possibly another angle to having the income stream through a company, allowing employer's contributions
 
Brendan Burgess said:
Is this absolutely final? Seems odd that they won't allow residential use in the current climate. Can you appeal to ABP?
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Common enough if the proposed new properties won't conform with minimum standards or would run foul of local development plans in terms of residential density, use mix, or the like.
 
helvetica said:
I have been advised to apply for a business loan in our own names, then setup a company which will lease the property from us.
Click to expand...
What is the business loan secured against if not the property?

In any case if it’s a commercial venture then can’t you get a commercial mortgage?
 
Dr Strangelove said:
What is the business loan secured against if not the property?

In any case if it’s a commercial venture then can’t you get a commercial mortgage?
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We have other assets with equity we can use for security.
I suppose I’m asking for advice on a commercial mortgage. Some have a minimum loan amount of €250k which is more than we need. Are rates typically in the 6-7% region, and 8 years the max term? Who are the players in the market that I can trust? This is not something I trust to a google search. Cheers
 
@helvetica
Just circling back to my post in response to Brendan's earlier, as I see you gave it a like - you'll need robust advice about the applicability of the 12.5% CT rate to your specific planned situation, if it's an important part of your plans. It's not an area I'm very familiar with.
 
Dr Strangelove said:
I can’t see a scenario where you’ll be better off setting up a company and paying CT on all drawings and then income tax, USC and PRSI after the CT.
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I'm going to let ChatGPT explain this one as I'm too lazy to actually write it all out...

Scenario: Married couple with €60k each of employment income, and a new business generating €40k net profit per year

Option 1: No Incorporation (Business Income as Personal Income)

If they run the business as a sole trader or partnership, the €40k of business income would be added to their personal incomes. This would push the entire €40k into the higher tax bracket (40%), along with USC and PRSI.

Income tax on €40k at 40%: €16,000

USC on €40k: Around €2,800

PRSI on €40k: Around €1,600

Total tax on the business income:
€20,400, leaving €19,600 net from the business profit.

Option 2: Incorporation and Pay Salary

In this case, the couple incorporates the business and the company earns €40k in net profit. They decide to draw the entire €40k as salary rather than dividends. Here’s how it breaks down:

1. Corporation Tax:
The salary paid to them would be a deductible expense for the company, reducing the company’s taxable profits to €0. Therefore, no corporation tax would be payable by the company.

2. Income Tax:
Any salary drawn would be taxed as employment income. Since both spouses already earn €60k each in employment income, any salary from the company would be taxed at the higher 40% rate.

Income tax on €40k at 40%: €16,000

USC on €40k: Around €2,800

PRSI on €40k: Around €1,600

Total personal tax on the salary: €20,400, leaving €19,600 net.

So, in this case, whether they operate as a sole trader or incorporate and pay themselves a salary, the end result is essentially the same: they are left with €19,600 after taxes.

When Incorporation Would Work Better:

Incorporation may be more beneficial for these reasons:

1. Reinvestment:
If they don’t need to draw all the profits immediately, leaving the money in the company to reinvest or save for future growth would mean paying only 12.5% corporation tax, allowing more funds to accumulate.

In this case, instead of paying themselves a salary, they leave €35,000 (€40k net profit minus €5,000 corporation tax) in the company, which could then be used for business expansion or investment.

2. Pension Contributions:
The company could make pension contributions on their behalf, which is tax-efficient. Pension contributions made by the company are deductible, reducing taxable profits, and the couple wouldn’t pay tax on these contributions until they draw from the pension in retirement, at potentially lower tax rates.

3. Limited Liability:
Incorporation provides a degree of legal protection, limiting personal liability for any debts or issues the business might encounter.

4. Potential future profits:
If the business grows and profits increase, incorporation can offer more flexibility in tax planning (e.g., retaining profits, income splitting, pension planning, etc.).

In this case, the main benefit of incorporation would not be immediate tax savings on salary but rather strategic long-term planning, investment, and protection from liabilities.
 
That actually very useful - can I ask what prompt you used in chat gpt?

I'm currently writing a business plan, so I have to estimate income and build cost, and I don't know exactlyhow much leverage we need. But I can give a ballpark:

Build cost €600,000 - (€350,000 cash-in-hand) = Need €150k commercial mortgage.

So as sole traders, lets say we get an income of €40k, and we are left with €19,600 to pay the business mortgage of say €16,200/year. This is before we count any of the running costs. We don't expect to be paid an income until the mortgage is paid, but hoping it will wash it's own face.

So, would it be more tax efficient to pay this mortgage as an incorporated business? Is there relief on mortgage interest? Is there a lower tax rate if you plough back the profits and don't take a wage? The tax rate on the rental income in the company is 25% because it is classified as "non-trading" investment income.
 
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OK so in Ireland, 100% of mortgage interest on loans used to purchase, improve, or repair a rental property is an allowable expense for companies AND individuals. In that case we can compare the two scenarios with some assumed figures:

Common:
€150K loan over 15 years @ 6.75%
Repayments €15924 per annum, or €9996 capital / €5928 interest
Income €40K less interest = €34072 taxable income.

Individual:
Tax 50% (roughly) = €17036
After Tax €22964, less repayments of €15924 = €7040 profit per annum

Incorporated:
Tax 25% = €8518
After Tax €31482, less repayments of €15924 = €15558 profit per annum

I'm sure I'm missing something, feel free to point out where I'm wrong!
 
helvetica said:
I'm sure I'm missing something, feel free to point out where I'm wrong!
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The whole approach is wrong.

You are comparing after tax profits in a company with the after tax profits in a person's own pocket.

You have to get the profits out of the company and they will then be subject to taxation again.

As I said in my first post, there is no financial (i.e. tax) advantage in inserting a company into this scenario. There may be advantages in limiting liability but you should have insurance anyway, to protect you from such claims.
 
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