Should I own investment property in Ireland in my own name or via a company?
When acquiring property, an important question at the outset is whether to hold it personally (in your own name) or via a company structure (often termed SPV or Special Purpose Vehicle).
Holding property via a company offers the following key advantages:
Flexibility of retaining profits for future investment, without having to pay marginal rates of tax on income realised;
Possibility of using a holding company structure and segregating property assets from cash;
Limited liability if borrowing for development.
Depending on your personal circumstances and future intentions, a corporate structure can be more advantageous. An overview is set out below.
Personal Ownership
Rental income
In principle, rental profit earned on Irish property will be subject to income tax, USC and PRSI. For marginal rate individual taxpayers therefore, based on current 2021 rates, your net taxable rental income could be taxed at rates as high as 55%.
Future sale
In most cases, the individual investor will be liable to 33% CGT on any gains made on a sale of their property. However, there are anti-avoidance rules in the Irish tax code which can recharacterise the capital gain into an income tax receipt (liable to the higher income tax rates) in certain circumstances. These rules need to be carefully considered at the outset.
Ownership via a Company
Rental income
Rental profit for a company is subject to corporation tax at a rate of 25%. However, where a company is a close company (broadly, a company controlled by five or fewer persons), rental income may be subject to a surcharge of 20% if it is not distributed to the company’s shareholders within 18 months of the accounting period in which it was earned. The effect of the surcharge can mean that the overall effective tax rate on such income is as high as c. 40%, a rate which is still lower than the marginal income tax rate of 55%. Depending on the circumstances, it may be possible to manage the surcharge exposure.
Where sizeable rental portfolios are involved, the incorporation of a property management company (“ManagementCo”) can generate some advantages. ManagementCo would charge a management fee to the property holding company and would be a trading entity such that any income earned is taxable at 12.5%, whilst being tax deductible in the property holding company at 25%. Hence, an overall saving of 12.5% on such income is achieved. It also assists in relieving the impact of the close company surcharge.
Future sale
If Irish property is sold by a company, any gain on sale will be subject to corporation tax on chargeable gains at an effective rate of 33%.
Extraction of income/gains
An obvious concern to an individual will be the reduced level of available income in his/her hands, given that the income now accrues to the company. The company will need to operate 25% dividend withholding tax on distributions made to the individual shareholder. That dividend will also be liable to income tax for the individual (potentially as high as 55% as mentioned above), with a credit claimed for the 25% tax already withheld at source by the company.
If, after a sale of the property, the individual decides to liquidate the company, any net proceeds received on liquidation should generally be subject to 33% CGT. There are always two layers of tax to bear in mind where a corporate structure is concerned.
A willing purchaser may be open to acquiring the property-owning company as opposed to the company itself, thereby eliminating the double tax exposure for the individual shareholder. However, most diligent purchasers will be educated on the “latent gain” that they will inherit by acquiring the company’s shares, and will seek a discount on the purchase price to compensate them for same.
Trading company for property development activities
A corporate structure is usually preferred for investors who intend to acquire property / land for full development and onward sale. This is because a 12.5% rate of corporation tax applies to trading income of a company generally. However, profits from certain “excepted trades” are taxed at the higher rate of 25%. This includes profits from dealing in or developing land, other than fully developed land.
In order to avail of the 12.5% rate, the land must have been developed by, or for the company, before it is sold (such that it would reasonably be expected that no further development would be required for another 20 years). It is important to review the proposed activities of the company in advance so you are comfortable the “trading” threshold will be met.
Holding property via a company also offers the following advantages:
Flexibility of retaining profits for future investment, without having to pay marginal rates of income tax on income realised from personally held investments, and opportunity to extract income as dividends or salary as the need arises;
Possibility of using a holding company structure and segregating property assets from cash (however it should be noted that a holding company will not be able to avail of the “participation exemption” from CGT where the shares derive the greater part of their value from Irish land or buildings);
Limited liability if borrowing for development.
There are additional administrative considerations associated with running a company. For example, the requirement to file annual returns and financial statements with the CRO and the requirement to file corporation tax returns with the Irish Revenue Commissioners.
Transferring property to a company
Where property is transferred by an individual to a company, the company will be liable to stamp duty on the acquisition of the property. The individual transferring the property may also be liable to CGT on the transfer, if the market value of the property at the time of transfer is higher than the individual’s original tax base. Any capital losses arising where property is transferred to a company owned by the individual are ringfenced, such that they can only be offset against gains on future disposals to the same company. Generally, the property will be transferred to the company for an amount owing (i.e. as a director’s loan) thereby enabling him/her to draw down the after-tax income within the company tax free up to the value of the property.
Conclusion
Depending on your personal circumstances and future intentions, it may be worth exploring the possibility of investing in property via a company, particularly if a long-term strategy is envisaged which can help reduce the overall effective rate of tax as described above.
When considering property investment through a company structure, timing can be crucial. Investors often need quick access to capital to secure properties or fund renovations before long-term financing is in place. In such scenarios, flexible bridging loans can provide the necessary short-term funding to move forward with investment opportunities, whether you're purchasing a property or releasing equity for further investments.
This article has been written for Onate by Fergal McConnon, Solicitor and Colin Bolger, Senior Associate in ByrneWallace Tax Advisors
Please note that the content of this article does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. No person is entitled to rely, in any manner, or for any purposes, on this article.
