A report issued on Monday 26th March from the Central Statistics Office confirmed that residential
property prices fell by almost 18 per cent in the year to February. Recent
surveys have estimated that property prices have actually fallen by 55 per cent
to 60 per cent from the peak.
While property
prices have fallen dramatically, a recent CSO report has shown that Irish
residential rents are continuing to rise 3% annually. This presents an opportunity
for individuals who are fortunate enough to have cash in their companies and
wish to invest in property. How this can be achieved in the most tax efficient
way is the next question.
CSO Report. Residential Property Price Index. [Image Online].Available at: http://namawinelake.wordpress.com/2012/03/15/cso-reports-irish-residential-rents-continuing-to-rise-3-annually/. [Accessed 26/03/12].
There are three
obvious ways of doing this:
- The cash could be extracted from the company by the
shareholder of the company and the property purchased by the shareholder after paying
income tax,
- the property could be purchased by the company or
- the property could be purchased through aself-administered pension.
The
self-administered pension can be the most efficient route of achieving this for
the reasons set out below.
Extracting
cash and then buying the property
Extracting funds
directly from the company to purchase the property personally would give rise
to significant income tax and potentially company law problems, so that generally
will not work.
Buying
property through the company
If the property is bought
through a company, there will be corporation tax on rent received (as well as
a close company surcharge). In addition there will
potentially be corporation tax on chargeable gains, if the property is sold,
although the new relief from CGT on sales of properties held for 7 years could
help here. However the same tax problem described above when sales
proceeds are extracted from the company will apply. It should also be noted
there are anti-avoidance provisions which prevent cash extraction at CGT
(rather than income tax) rates which could also come into play. Furthermore purchasing an investment property in a company can adversely impact
on the availability of CGT retirement reliefs and CAT business property
reliefs which may be relevant in due course.
Buying
property through a self-administered pension
The alternative is
to purchase the property through a self-administered arrangement. On the basis
that the required contribution can be made (which involves a funding
assessment),
- a corporation tax deduction would be available for
the company’s contribution and
- the rent could be received tax free in the pension.
- there is no CGT on sale of Irish residential
property by a pension
On retirement 25% of the fund can be taken tax-free by the client with the first €200,000 tax free with the balance from €200,000 to €575,000 taxed at 20%. The property could
be transferred in specie to an ARF post retirement and could continue to
generate a post retirement income.
This illustrates
how the self-administered route still makes sense as a tax efficient way to buy
property.
