Key Post Should my trading company buy its premises or should I buy it and let it?

Joe_90

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2,226
Take a company that is currently renting its business premises paying €35,000 and the property comes up for sale. The price is €500,000.

So the company has €100,000 to use as a deposit and borrows €400,000 at 5%. So let look at the figures over 20 years.

|
So the company will save the rent €35,000 x 20 |+700,000
Deposit|-100,000
It will payback the loan + interest,|-€633,600
Extra CT due to reduction in rent | -€ 53,300
|-€86,900
If the company were to sell the property in 20 years for |+€750,000
CGT €750,000 - €500,000 = 250,000 x 13/20 = 65000 x 33% |-€53,625
Cash in company|€604,475
If the company is liquidated CGT payable 33%|€199,477
Net proceeds to shareholder|€404,998

This assumes no retirement relief on the date of disposal
 

Joe_90

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2,226
There are a number of ways of looking at this. Loan for the full amount, interest only portion. But lets look at a 10% deposit and full repayments.

So lets consider the position of the shareholders they don't have any cash for the deposit so they take the €100,000 from the company and pay 52% tax ect on it and use the net for the deposit. The biggest issue here is the company pays 12.50% and the shareholders pay 52%.

So the shareholders have to repay a total of €500,000 after paying tax at 52% so thats €1,042,000 and also interest of €264,000, thats a draw on the company of €1,306,000.

|
So the company will save the rent €35,000 x 20 |+700,000
Rent to directors|-€1,306,000
Reduction CT due to increase in rent | +€75,750
|-530,250

If the shareholders were to sell the property in 20 years for |+€750,000
CGT €750,000 - €500,000 = 250,000 x 13/20 = 65000 x 33% |-€53,625
Net proceeds to shareholder|€696,375
Overall position Company -€530,250 Shareholder €696,375 | €166,125

Again assumes that Retirement Relief is not available on date of sale.
 

Brendan Burgess

Founder
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39,186
Hi Joe

Thanks very much for volunteering to write this Key Post. I appreciate that this is a Work in Progress, but here are some initial comments anyway.

Will the company be able to borrow at 5%? That seems very low for a commercial property loan. The cheapest RIP mortgage rate at the moment is 5.3%.

I think it's best to compare the annual cost rather than look at cumulative costs over 20 years.

For example

Rental: €35,000
Less interest on €100,000: €2,000
Net cost: €33,000

Buy the property for €500,000
Mortgage interest: €400,000 @6%: €24,000

Buying the property increases profit by €9,000

Factors which may change the calculations:
Rent may rise which would favour buying.
Interest rates will rise which would favour renting

Cash-flow issues
Company will need to retain profits of €400,000 over next 15 years to repay loan. This is usually bad tax planning.

Business factors which favour buying
Security of tenure
Simpler management - no need for landlord approval to adapt property or sub-let or fix problems
Building up €500,000 of assets in the company gives the company protection against poor trading conditions in the future.

Business factors which favour renting
Could be more flexible e.g. if the business grows and needs more space, it's usually easier to move.
If you sell the business or give shares to employees, you will be giving shares in a trading and property company.
 

Joe_90

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2,226
If someone wants to review those figures that would be great!

Brendan,

If you are comparing purchasing v renting from a 3rd party an annual comparison is relevant but I think for the shareholder v company purchasing property you have to consider the impact of the different tax rates and to do this you have to consider the long term.

To illustrate my point

Shareholder
|Year 1|Year 20
Repayments|36,000|36,000
Interest|22,500|672
Tax|7,000|18,371
Extra Rent to pay tax |14,000|38,272
Total rent paid|50,000|74,272


The rate of interest is not that relevant to the discussion of a co v shareholder as long as the rate is the same for both. We have to make the assumption that the rate remains consistent over time.
 

Joe_90

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2,226
This is only applicable to the discussion of a company purchasing its HQ building.

The difference between a HQ building is that the rate of tax is 12.50%.

If the property is rented then the rate of tax is 25% and the surcharge is 15% so the effective rate is 40%. In that circumstance it just can't work.
 

chillaxed

Frequent Poster
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11
I will come at this from a different angle, cash flow.

Suppose a company has €100K in the bank, would the bank give a director a loan of €100K in his own name and hold the €100K of company funds as security?

If the individual withdraws the €100K he gets hit for approx. 50% tax so only has €50000 for a property!
 

Brendan Burgess

Founder
Messages
39,186
I very much doubt it.

But why go to such complex messing? Plan your tax affairs so that the company does not have spare cash. The director will have €50k and will be able to use that as a deposit on the property.

Brendan
 
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