A friend of mine who is a gym operator and owns 100% shares in his Ltd Company is looking to expand . He has asked me for some advice not really my area, can anyone please help? He has his eye on a new property which he feels is an ideal location costing €1.5 million; he has this money in his own personal savings should he buy the property in his own name and then rent it to his company or does he buy it through the company as this has funds of approx €800,000 and the banks have already assured him that he would be good to borrow additional money required. Has anyone got any advice on how he should acquire the premises? He has asked his accountant but firmly believes in getting other peoples opinions.
Buying Property for a business through a company?
- Thread starter Bonzo
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Re: Buying Property
It's better for him to purchase the property in his name and rent it to the company. If he buys the property in the companies name the property is locked into the company and he would have to take a double hit on tax when he eventually sells it. e.g. CGT on the sale and then income tax when he goes to extract the funds from the company.
If he purchases the property in his name, he can rent the property to the company and pay tax on any rental profits, however the chanes are the profits will be quite low after paying mortgage interest. When he eventually sells the property he pays CGT @25% opposed to Income Tax of 41% through the company.
It's better for him to purchase the property in his name and rent it to the company. If he buys the property in the companies name the property is locked into the company and he would have to take a double hit on tax when he eventually sells it. e.g. CGT on the sale and then income tax when he goes to extract the funds from the company.
If he purchases the property in his name, he can rent the property to the company and pay tax on any rental profits, however the chanes are the profits will be quite low after paying mortgage interest. When he eventually sells the property he pays CGT @25% opposed to Income Tax of 41% through the company.
Complainer
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Re: Buying Property
They are the relevant rates if he sells today. Who knows what rates will be in place in 5/10/20 years time.
Brendan Burgess
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Re: Buying Property
This issue is very clear and is discussed in this Key Post. The rates may be out of date, but the principles are the same.
I would be concerned that a company owned by an individual has €800k in cash. It sounds like poor tax planning to me unless the €800k represented prepaid memberships.
This issue is very clear and is discussed in this Key Post. The rates may be out of date, but the principles are the same.
I would be concerned that a company owned by an individual has €800k in cash. It sounds like poor tax planning to me unless the €800k represented prepaid memberships.
Re: Buying Property
In the current climate I would take into account the possibility of the company failing. A personal mortgage means that the owner is personally exposed, i.e. has risked their home. Given the amount of commercial property on the rental market there is no guarantee that a new tenant could be found that would pay sufficient rent to cover the mortgage. It also means that if the owner seeks to sell the business at a later date it makes it far less attractive.
I’m not saying that, on balance, the owner should not buy the premises and rent it to his business. I am simply saying that there are many factors that have to be taken into account and unless the OP is going to post extensive details about his friends personal and financial affairs in this thread I think he should seek professional advice.
In the current climate I would take into account the possibility of the company failing. A personal mortgage means that the owner is personally exposed, i.e. has risked their home. Given the amount of commercial property on the rental market there is no guarantee that a new tenant could be found that would pay sufficient rent to cover the mortgage. It also means that if the owner seeks to sell the business at a later date it makes it far less attractive.
I’m not saying that, on balance, the owner should not buy the premises and rent it to his business. I am simply saying that there are many factors that have to be taken into account and unless the OP is going to post extensive details about his friends personal and financial affairs in this thread I think he should seek professional advice.
Brendan Burgess
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Is there a case for revising this advice on the grounds that you mention?
I will update the Key Post later, but let's tease it out here and see can we construct a set of "depression-era" circumstances where it might make sense to buy a property through a company?
I have been badly advised over the years and I now have €800k cash in the company. I want to buy a property for €1.5m
I buy the property in the company - €800k cash and €700k bank loan.
The business starts to lose serious money - say €200k a year and there is no hope for the future.
The price of the property drops by 50%.
I now have a serious cash-flow problem - I can't pay my creditors.
I put the company into liquidation and the liquidator sells the property.
I will end up with nothing.
So in a sense, I have lost my €800k tax efficiently. I have not worked out all the implications of this, but it could possibly work out better in these exagerrated circumstances for the person to buy a property through a company.
Here is a more likely scenario.
You buy a property for €1.5m through a healthy profitable company.
In ten years' time, the property is worth €3m but the market has changed and the company is losing money.
You struggle on for years with a loss-making company because it is asset-backed.
Eventually you lose the lot.
If you had bought the company personally, the losses would be far more obvious earlier on and you would close down the loss making business. You would end up owning the property personally. Sure you might have difficulty getting a tenant, but that's the way property investment works.
I will update the Key Post later, but let's tease it out here and see can we construct a set of "depression-era" circumstances where it might make sense to buy a property through a company?
I have been badly advised over the years and I now have €800k cash in the company. I want to buy a property for €1.5m
I buy the property in the company - €800k cash and €700k bank loan.
The business starts to lose serious money - say €200k a year and there is no hope for the future.
The price of the property drops by 50%.
I now have a serious cash-flow problem - I can't pay my creditors.
I put the company into liquidation and the liquidator sells the property.
I will end up with nothing.
So in a sense, I have lost my €800k tax efficiently. I have not worked out all the implications of this, but it could possibly work out better in these exagerrated circumstances for the person to buy a property through a company.
Here is a more likely scenario.
You buy a property for €1.5m through a healthy profitable company.
In ten years' time, the property is worth €3m but the market has changed and the company is losing money.
You struggle on for years with a loss-making company because it is asset-backed.
Eventually you lose the lot.
If you had bought the company personally, the losses would be far more obvious earlier on and you would close down the loss making business. You would end up owning the property personally. Sure you might have difficulty getting a tenant, but that's the way property investment works.
How about this scenario:
Company has €800’000.
Owner buys property in 2010 and rents it to his company.
Over the next 2 years property prices continue to drop (say by 10-15%) and trading conditions deteriorate. He is then forced to voluntarily liquidate the business. His creditors pick off most of the cash reserve (much depleted at that stage) and he is left in negative equity with a huge mortgage to pay. I’m not saying it’s the most likely scenario but this is about what you can afford to lose, not just what you might gain.
Company has €800’000.
Owner buys property in 2010 and rents it to his company.
Over the next 2 years property prices continue to drop (say by 10-15%) and trading conditions deteriorate. He is then forced to voluntarily liquidate the business. His creditors pick off most of the cash reserve (much depleted at that stage) and he is left in negative equity with a huge mortgage to pay. I’m not saying it’s the most likely scenario but this is about what you can afford to lose, not just what you might gain.
Brendan Burgess
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If trading conditions deteriorate, he is much better in having the property in his own name. It forces him to take a realistic view of the company and take action quicker. Although not relevant in this case, it protects the property from the company's creditors.
Is there a case for buying a property in a company in case property prices fall, although the company remains profitable? I would have to think about that, but I can't see it. It could be a risk avoidance strategy.
Is there a case for buying a property in a company in case property prices fall, although the company remains profitable? I would have to think about that, but I can't see it. It could be a risk avoidance strategy.
There will be a tax saving if the property is bought personally. The tax savings are not as high as previous posts say. If the propery was held in the name of the company and the company then sold to a third party the payment to the shareholders would be a capital distribution. If the company was wound up as a members voluntary liquidation and therefore taxed as cgt and not income tax.
Also, by leaving the property in the personal name of the investors it does draw a clear line and protects the shareholders investments should the business fail.
Nevertheless this is still a double hit!
If the property is bought either personally or through the company with the level of borrowings mentioned I would be concerned about the availabilty of cash to pay for equipment renovations and mortgage repayments before the business is up and running let alone profitable! The cash position does not change either way just make sure that prudent cash flow projections are prepared before moving forwards.
If the business fails and the property can be sold and hopefully property prices have not declined so much so that after the sale of the property that there is not more than enough funds available to discharge the liability to the bank let alone some return on the initial 800k.
As for Brendan's comments about a risk avoidance strategy, "if property prices fall but the company remains profitable". There is no benefit if the property is bought in the name of the company as in this scenerio the landlord has a decent tenant and the property price drop means nothing except that it is negatively affecting the valuation of the company should it be put up for sale.
Also, by leaving the property in the personal name of the investors it does draw a clear line and protects the shareholders investments should the business fail.
Nevertheless this is still a double hit!
If the property is bought either personally or through the company with the level of borrowings mentioned I would be concerned about the availabilty of cash to pay for equipment renovations and mortgage repayments before the business is up and running let alone profitable! The cash position does not change either way just make sure that prudent cash flow projections are prepared before moving forwards.
If the business fails and the property can be sold and hopefully property prices have not declined so much so that after the sale of the property that there is not more than enough funds available to discharge the liability to the bank let alone some return on the initial 800k.
As for Brendan's comments about a risk avoidance strategy, "if property prices fall but the company remains profitable". There is no benefit if the property is bought in the name of the company as in this scenerio the landlord has a decent tenant and the property price drop means nothing except that it is negatively affecting the valuation of the company should it be put up for sale.
Are you suggesting that a 100% uplift in commercial property values in the next decade is likely?