Rental Income -when to create a company?

Hi,

This is probably a very stupid and naive question but when does it become feasible to set up a holding company for properties you have to rent out? As in what are the number of properties that make this work?

Always thought it a joke the way a normal landlord pays the 40% on rental income but AFAIK most of the big corporate landlords would only pay 12%.

It never makes sense for an individual.

You pay Corporation Tax and CGT within the company and then pay Income Tax and CGT when you try to take it out.

Brendan

I don't agree. If you're a person whose marginal personal tax rate is 55% and you don't need the rent to finance your day to day living i.e. if rent profit in your hands personally solely builds up in your personal deposit account a company is a better store of value over the long term as the annual tax on a company's profits is 25% plus a close company surcharge at an effective rate of 20%. That's 10% less tax a year. You can sell the shares in the company instead of selling the property to avoid a double charge to CGT. The level of rental profit is a factor here also. If you just have 1 or 2 properties earning 10k rental profit before tax the extra administration expenses of running the company may tip the scales to being better off holding personally. 100k annual rental profit and the extra admin expenses may no longer be as big a deal.

BigBoots82 said:

You can sell the shares in the company instead of selling the property to avoid a double charge to CGT.

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The fact that the company has unrealised gains, which will be taxable on sale of the properties, will impact on the value of the company itself.

I've yet to see a scenario in Ireland where it makes sense.

RedOnion said:

The fact that the company has unrealised gains, which will be taxable on sale of the properties, will impact on the value of the company itself.

I've yet to see a scenario in Ireland where it makes sense.

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The premise to use as a better store of value would be that you intend to hold forever and never intend to sell. CGT doesn't matter if you never sell. Also, yes a purchaser could ask for a discount for a potential future cgt liability. If you're the kind of person that's a high net worth individual under no pressure to sell you can just as easily refuse and carry on compounding at a better rate than you could personally. I agree for your regular person holding personally makes sense but not all people are in this category.

BigBoots82 said:

The premise to use as a better store of value would be that you intend to hold forever and never intend to sell. CGT doesn't matter if you never sell. Also, yes a purchaser could ask for a discount for a potential future cgt liability. If you're the kind of person that's a high net worth individual under no pressure to sell you can just as easily refuse and carry on compounding at a better rate than you could personally. I agree for your regular person holding personally makes sense but not all people are in this category.

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Right, so you've outlined a scenario where a person who never ever needs to get money out of the company, and is willing to hold the company (and the company hold the properties) indefinitely as being a scenario where it might make sense?

I'm saying a company is a better long term store of value where that is the case. If your company is in a group you can also recycle the lower taxed profits into other group companies to use for other ventures which you couldn't do if you held the rental portfolio personally.

With respect, that’s just not the case. Unless you’re at the REIT/securitisation scale (i.e. €20m plus rent roll perhaps) it makes no sense to hold property through a corporate.

Big Boots

You are a victim of the apparent wealth fallacy.

You have a company with property worth €1m and I have property in my own name worth €900k, so you think that you are wealthier than I am.

But the reality is that the €900k belongs to me. The €1m belongs to the company, and whatever you do, it will cost you a lot in tax to get it out.

If I need €300k, I can sell one of my properties. If you need €300k, you are stuck. You will have to sell a property in the company and pay CGT. Then you will have to get the cash out and pay income tax on it.

If I want to sell my three properties I will put them up for sale and it's likely that there will be three buyers.

If you want to sell, or your executor wants to sell, you offer a company for sale for €1m. You will have a very narrow market. And they will reduce the price by at least 20% to allow for the tax liabilities.

Brendan