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Sole Trader or Limited Company?

March 15, 2018

The first question to be considered is whether you carry on business in your own name, i.e. Sole Trader or through the medium of a Limited Company.

As a Sole Trader you are personally liable for all the debts of your business. If the type of business you are engaged in leaves you open to be sued for substantial damages in the event of errors or mistakes then you should consider trading through a limited company.

To illustrate the point consider the position of a plumber who installs central heating systems. If the boiler subsequently blows up serious damage could be caused. This plumber should trade through a limited company to avail of the limited liability status of a company so that his personal assets are not exposed in the event of business failure. On the other hand a selfemployed painter is unlikely to require limited liability to the same extent as the plumber.

For Administration purposes a limited company involves more “red tape” as the company has to make its own tax returns and returns to the Companies Office. On the positive side, if the business is going to make substantial profits in excess of your own salary requirements then these profits will be taxed at the 12.5% tax rate as against the top 52.5% rate for a sole trader.

In addition pension funding rules can be better for a company as compared to a sole trader. It is important to consider this matter in detail and if in doubt seek professional advice. We can provide this service on a consultancy basis for which an extra charge will arise.

The three year tax exemption for new limited companies should be considered. This is explained in more detail in Section 4 below.

 

We can provide further advice on this matter by way of consultation.

Or

Form Your Own Company with freecompanyformations.ie Now .

Trading Through Companies

March 12, 2018

The principal benefit is limited liability for the debts of the business. In addition a new exemption from company taxation applies from 2009 for new business commencements. However, this will only be of benefit if the company has profits. If the owners take out the profit by way of salary or dividend the benefit of the exemption will be lost. Needless to say there are various rules and regulations attaching to this company tax exemption that need to be considered. We can give more detailed advice on the operation of the rules subject to an additional fee.

Another benefit is that companies pay tax on their profits at a rate of 12.5% compared to a top Income Tax/PRSI/USC rate of circa 55%. However this will only be available if profits are left in the company and not taken out by way of salary or dividend. Finally pensionfunding rules are different for companies and may be more beneficial than compared to the rules for the selfemployed.

For existing businesses carried on either as sole traders or in partnership transferring to a limited company can prove worthwhile and save tax as well. Where the existing owners qualify for the capital gains tax retirement relief, the business can be sold to your limited company and depending on values can ensure tax free benefits for the original owners.
On the downside there is a lot more red tape associated with trading through a limited company. The company has to make its own tax returns and also returns to the Companies Registration Office. There are numerous tax rules and regulations policing small limited companies. In addition company law rules are now also a major consideration when considering whether or not to carry on business through a limited company.

A Company Formation Agent can arrange for the setting up of a limited company on your behalf and the costs involved are relatively inexpensive generally costing a few hundred euro.
Once the company is formed the normal tax registration procedure is followed. The company must complete a Form TR2. However even though you may own the company for tax purposes you will be treated much the same as any employee for PAYE/PRSI purposes except for not being allowed the benefit of the PAYE employee tax credit. Any shareholder director who owns more than 15% of a company is not allowed the PAYE tax credit in respect of income received from that company.

The same rules and procedures apply for calculating a company’s profits for tax purposes as already explained for a selfemployed person.However instead of tax years a company pays its tax by reference to its accounting period. A preliminary tax payment must be made in the second last month (by the 21st of that month) of its accounting period and the balance is payable nine months (by the 21st of that month) after the end of its accounting period. A company pays corporation tax at a rate of 12.5% on its trading profit. The profit is after deducting all allowable costs for directors e.g. salaries, pension payments etc. If a company has nontrading income e.g. rental income or deposit interest it pays tax thereon at 25%. There is also a further surcharge on nontrading income of 20% if the nontrade income is not paid out to the shareholders of the company by way of dividend.

4.1 Companies How Shareholder Directors pay Tax

A Shareholder Director in receipt of Directors salary is liable for PAYE/PRSI thereon like any other employee. Also they are not allowed the normal PAYE tax credit it they own more than 15% of the share capital of the company. A Shareholder Director who holds over 50% of the shares of the company will be liable for PRSI on the same basis as a selfemployed person i.e. no employers PRSI but PRSI charged on all income at a rate of 4%.

If a Shareholder/Director receives a dividend out of the after tax profits of the company the Income Tax/PRSI/USC due thereon is payable through the selfassessment tax system. A question that often arises is whether it is more beneficial to receive a dividend or Directors salary. For tax purposes the Directors salary although taxed under PAYE gives a lower tax liability than a dividend and it means the income can be included for pension funding calculations whereas a dividend cannot.

4.2 Family Members Working in the Company PRSI Implications

For PRSI purposes an important difference applies particularly for spouses of the Shareholder/Director as against a Sole Trader engaging family members in the business.
If a spouse receives income from a limited company both employers and employee PRSI may arise thereon. This is because the company is a separate legal entity from the owner of the business. The same applies to any children of the owner working in the business.

4.3 PRSI Refunds for Companies

Sometimes companies may be paying employers PRSI unnecessarily on salary payments to shareholder directors. Historically, employer PRSI may have been paid on all salary payments to director shareholders who did not own more than 50% of the share capital of the company. However, this may not be correct. In a recent case of a private company with four owner directors all under 50% shareholding we secured a PRSI refund of almost €1million for the company.

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Owner directors of private companies should always check the position for payment of Employers PRSI. There could be substantial refunds due. We can provide additional advice in this area, subject to an extra fee.

4.4 Use of Companies for Pension Funding

The use of companies for pension funding can be more effective than the tax relief available for the selfemployed. This is because of the way in which the rules for each category operate. For a company the important factors are the age of the director, level of salary and the length of service. The percentage limits and income cap which applies to the selfemployed are ignored for companies. The typical case in real life is where somebody has been running their business for a number of years and are at the stage where the business is generating a profit in excess of their normal salary requirement probably in their forties and are now considering pensions and retirement.

If they are already carrying on business through a limited company and have not made any provision for pension funding in the past there should be substantial scope for the company to make significant tax allowable contributions into a pension scheme for a director.

The use of selfadministered pension schemes allows people to take full control of their pensions and direct how the payments into the fund should be invested. This type of scheme is allowed borrow to make investments which has proved very popular for property investment.
The basic rules to be met when setting up a selfadministered scheme are as follows:

  • Revenue approval for the scheme which should not be a problem unless you are attempting something unusual with your pension scheme.
  • Appointment of an independent trustee for the scheme who must also be approved by the Revenue. The trustee sets up the scheme and deals with all the associated paper work.
  • You must be at least a 5% shareholder in the company which is providing the scheme for you.
  • All contributions to the scheme are subject to normal pension funding rules. The test here is not subject to the percentage age based limit and earnings cap which applies to Sole Traders and Partners.
  • You are not allowed to sell personal assets to your pension scheme.
  • There are restrictions on certain types of assets that the pension fund can invest in. For example prideinpossession articles e.g. antiques are not allowable investments.
  • Various options are available at retirement age on how to deal with the accumulated pension fund. You can take a quarter of the fund tax free subject to certain limits. Your pension benefits e.g. tax free lump sum can be taken from age 60 onwards without actually retiring from your business.

When a family business is being transferred to the next generation the use of these schemes can prove very useful for both tax purposes and the longterm security for parents reducing their involvement in the family business.
As everybody’s affairs are somewhat different we give more detailed advice on this area by way of consultation for which a separate charge will arise.

We can provide further advice on this matter by way of consultation.

Or

Form Your Own Company with freecompanyformations.ie Now .

Self Employed – Pension Funding

March 9, 2018

This is a very important area of tax relief combined with planning for your future. Please read our detailed article on Pension Funding which provides details of the maximum allowable pension contributions for tax purposes. There are now a variety of investment methods open to individuals for investment of funds via a pension structure. Tax relief at your top tax rate is available for contributions paid in and investment growth on your investment accumulates free of tax.

For selfemployed individuals there is a limit on the amount of pension contribution qualifying for tax relief in any one year. This depends on your age and level of earnings.
There is a very useful back dating arrangement allowed for the selfemployed, which gives time to examine your figures before you have to make a payment. You have until the 31st October after the end of the tax year in which to make a pension contribution and tax relief will be allowed in the earlier year. From a cash flow point of view there is almost double tax relief obtained for your first lump sum pension contribution.

Our Pension Contribution Calculator will do the figures for you and show the maximum amount you can put into your pension for tax relief purposes. If you are making regular contributions throughout the year it will also show you how much of a pension contribution top up you can make to obtain tax relief in the previous tax year.

 

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Share Dividends

March 9, 2018

You need to divide your share dividends into the following;

  • Dividends paid by Irish companies
  • Dividends paid by UK companies
  • Dividends paid by US companies
  • Dividends paid by Canadian companies
  • Other foreign dividends

Dividends paid by Irish companies

Many Irish companies pay dividends twice a year and will always deduct 20% tax at source from the gross dividend. If you are liable for tax at a higher rate you will pay tax on the gross dividend at the higher tax rate and be given a credit for the 20% tax already deducted.

PRSI and the USC are also due on the gross dividend and will be collected through the Self Assessment system if applicable.

Dividends paid by UK companies

You pay Irish tax on the net dividend received by you. No credit is allowed for any UK tax already deducted from the dividend payment. You must convert the net payment received to Euros and declare it on your Irish tax return form.

PRSI and the USC are also due on the dividend and will be collected through the Self Assessment system if applicable.

US, Canadian, & Other foreign dividends

The rules here are very complicated and the credit allowed by the Irish Revenue for foreign tax paid depends on whether or not we have a Double Taxation Treaty with the country from which the dividend is received. The basic rule is that the Irish Revenue will never grant a credit for foreign tax that exceeds the Irish tax liability on the foreign income and will never refund foreign tax to you.

There is a complex formula that must be applied to foreign dividends received from countries with which we have a Double Taxation Agreement. This involves grossing up of the net dividend received by you at an agreed rate published by the Revenue Commissioners for various countries. This rate recognises the tax already paid by the company abroad in earning the profits out of which the dividend is paid. Current Revenue practice seems to be that dividends received from the USA and Canada must be separately identified on your tax return form and dividends from all other countries get lumped together notwithstanding the different underlying tax rates that may apply to different countries.

Unless you have very substantial dividends from foreign countries (ignoring UK, USA & Canada) then the broadbrush approach applied to such income will not make any significant difference to your Irish tax liability.

Sometimes dividends received from foreign countries will suffer an Irish tax deduction on encashment. If this applies you will get a full credit against your Irish tax for this deduction. If you do not owe tax you will get a refund of the Irish tax deducted.

Where dividends are received from foreign countries where no double taxation agreement exists you will normally pay Irish tax on the net dividend received with no credit allowed for the foreign tax deducted from the dividend payment.

We can provide further advice on this matter by way of consultation.

Our Dividend Recording System

When recording information in this section you will be asked to identify the source of the dividend payments i.e. Irish, UK, or Foreign. The credit for Foreign Tax will be allowed in the calculation of your tax liability in the field Foreign Tax Deducted in the main income tax calculator.

 

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Private Residence Mortgage & Loan Interest Tax Relief

March 6, 2018

This tax relief is only available in respect of your principal private residence. If you have more than one residence you must nominate one of them as your principal private residence for the purposes of mortgage interest tax relief. The relief is available in respect of interest on borrowings used for the purchase, improvement or repair of your property.

From 1st May 2009 the maximum allowable period for mortgage interest tax relief is 7 years. This applies to all private residence loans and mortgages in place on the 1st May 2009 and all future loans. Anybody who benefited from mortgage interest tax relief prior to 1st May 2002 are not entitled to relief after 1st May 2009. The relief will be abolished completely for the tax year 2018 and subsequent years.

No tax relief is allowed for mortgages taken out after the 31st December 2012.

The rules for the rate of relief on interest qualifying for tax relief changed in 2009, 2010, 2011 and again in 2012 and are summarised as follows;

  • First-time buyers – the rate of mortgage interest relief is increased from 20% to 25% in years 1 and 2 and to 22.5% in years 3, 4 and 5. The relief remains unchanged at 20% for years 6 and 7 of the mortgage. The maximum amount of interest paid qualifying for tax relief is €20,000 for married couples/ civil partnerships and widowed. For single people the limit is €10,000.

  • Non-first time buyers – the rate of mortgage relief is reduced from 20% to 15%. The maximum amount of interest paid qualifying for tax relief is €6,000 for married couples/ civil partnerships and widowed. For single people the limit is €3,000.

The tax relief is allowed at source by lending institutions. Once the necessary forms are completed, qualifying mortgage repayments are calculated after deducting the mortgage interest tax relief. If the tax relief has not been allowed by the lender during the tax year the relief due has to claimed directly from the Revenue.

If the lender is not allowing your mortgage interest tax relief you should contact the Revenue Commissioners at TRS Section, Collector-General’s Division at 01 7383663 who will arrange for the relief to be given to you. The Revenue will need details of your mortgage account number and the lender involved to check the position for you.

Bridging Loans
If you are moving house and have purchased a new private residence on bridging loan finance pending the sale of your first residence there is additional tax relief available on the bridging loan interest. This extra relief is allowed for a period of 12 months. The maximum interest qualifying for this special relief is the same as the amounts referred to above for normal mortgage interest tax relief.

Unsecured Home Loans
Relief for interest payments made on unsecured Home Loans e.g. short term personal bank or credit union loans used for qualifying purposes, i.e. repair or improvement of your sole or main residence, must be claimed through your local tax office.

Acquiring an Investment Property

March 6, 2018

What entity should own the property?

The first matter for consideration is who or what entity should acquire the property. This will be influenced by the long term intentions of the purchaser. Property can be acquired in personal names, co-ownership and / or partnership structures, through different forms of trusts and through companies.
Generally residential property is purchased directly by individuals either solely or jointly with others. It is usually acquired for the long term with a view to providing assets/income for the individual’s retirement. Over the past decade many parents purchased property which they intended passing to their children at a later time.

Residential Versus Commercial
It is generally considered to be easier and less expensive to enter the residential property investment market rather than the commercial property market which normally involves a larger capital investment requirement and usually a different letting structure e.g. long leases as distinct from shorter leases for residential property.
Investors tend to be more familiar with residential property and there would appear to be significantly more individual residential investors owning between two and six units with the vague intention of passing them on to their children at sometime in the distant future. Many investors own just the one property but may intend adding to this in the future when the time is right for them.
Other investors have significantly more residential units and let them along normal business lines with a view to capital growth and income generation.

Cash Requirement
In the current economic climate it may be difficult for investors in residential property to obtain loan finance for property investment as lenders have reduced the amounts they are prepared to lend to this sector and some lenders withdrew from the market altogether. Lenders may limit borrowings to 50 – 75% of the cost of the property for investors in residential property.
For commercial properties lending agencies will generally limit borrowings to 75% of the cost of the property. Given that the property is likely to be dearer to begin with there will be a bigger gap between the total cost of the property to include stamp duty, legal fees etc and the amount of borrowings which can be secured thereon. Groups of individuals often come together to acquire commercial property in a co-ownership structure to share the costs between them. Generally commercial properties are let under lease often for long periods e.g. 21 years or 35 years with five yearly rent reviews.
Use of Companies
Companies can also be used to purchase property. Acquiring properties can make a good form of investment for after tax profits retained in a company. If such profits were taken out of the company by the individual owners almost half of it would go in the payment of taxes.
Companies pay tax at a rate of 25% on rental profits. In addition, there is an extra tax charge on undistributed profits. However, for cash rich companies it can prove more tax efficient to directly purchase property rather than paying salary or dividends to director shareholders to purchase property in their own personal names.
Pension Schemes
It is possible to set up self-administered pension schemes for shareholder/directors of limited companies. The pension scheme can be utilized for property investment. This can be done in a number of different ways and depends on each individual’s particular circumstances. The tax benefits provide a full tax write-off for the cost of the property against business profits with the added benefit of tax-free income and capital appreciation.
Foreign Property
There has been significant investment abroad by Irish residents over the last decade. Areas that proved particularly popular have been the U.K., France, Portugal, Spain, United States and Eastern Europe. Investors buying a property abroad should carefully consider additional factors such as currency movements, local management costs, ease of disposal at a later date, and the impact of local taxes on property transactions. It should also be noted that Irish tax residents must make rental returns in respect of foreign properties to the Irish Revenue and also account for Irish capital gains tax on any disposals in addition to paying whatever taxes may be due to the Foreign Revenue. A credit may be allowed for any foreign tax paid against the Irish tax due on the foreign income. The amount of the credit depends on the rules of our Double Taxation Agreement with the relevant country. If Ireland does not have such an agreement with the country in question you may not get a credit for foreign tax paid.
Parents buying Property for Children 
Many parents are involved in helping children to buy a property either by providing lump sums for deposits or loan guarantees etc. Many property investors bought property with the intention of giving them to their children at a later stage. This is normally dealt with in the following way:

  • Property owned by parents until children are old enough to take possession and the parents are happy to give it to them.
  • Property bought jointly with children so that the child has an equity interest in the property from day one.
  • Property bought in the childs name only with parents acting as guarantors on the loan.
  • Use of companies or trusts to acquire the property with the children as beneficiaries of the trust or shareholders in the company.

In each of the above situations the following taxes need to be considered when dealing with the property:

  • Income Tax on rental income from the property
  • Capital Gains Tax
  • Gift / Inheritance Tax
  • Stamp Duty on any sale or transfer of the property or interest to a child.

We can provide specific advice on this matter by way of consultation.

 

What are Benefits In Kind (BIK)

March 5, 2018

General

The tax due on benefits in kind are taken at source by your employer and are also taken into account for PRSI and USC Levy purposes by treating the benefit in kind as part of your salary payment.

The most common Benefit in Kind Tax is the company car. All employees who are provided with a company car should check to ensure that their employer is correctly calculating the Benefit in Kind Tax due on the company car. Our car Benefit in Kind Tax calculator will allow you do so.

Electric cars and vans

From 1 January 2020 to 31 December 2020 electric cars and vans are exempt from Benefit in Kind Tax. The open market of the car must be less than €50,000 or first used by the employee between 10th October 2017 and 9th October 2018. Unfortunately the Benefit in Kind Tax exemption does not apply to hybrid cars or vans.

You might wonder what is a company car? The answer may appear obvious but when dealing with tax matters things are never that simple. In addition to the normal passenger car you must also include Jeeps (both two and four seaters), crew cabs and vans. Two seater jeeps, and vans attract a Benefit in Kind Tax at a rate of 5% of the open market value of the jeep/van. We discuss these matters and the calculation of the benefit in kind in more detail below.

Crew cabs  depending on the circumstances may be treated as either a car or a van. The method of calculating the taxable benefit in kind for both cars and vans prior to 2004 was more complicated.
Another common benefit in kind is the preferential loan generally provided by financial institutions to their employees. When interest rates were particularly low a lot of employees switched over to normal commercial loans as it was more beneficial because of the tax on the benefit received.
Other benefits in kind include the provision of accommodation, house furnishings etc. These are not that common.

 

Company Cars

The taxable benefit in kind is calculated as 30% of the market value of the car when new. This is referred to as the original market value (OMV) and is used even where a second hand car is provided. In addition the OMV figure does not go down as the car decreases in value. The original brand new value is always used to calculate the taxable benefit. As a rule of thumb the OMV is normally taken as the list price of the car less 10%.

The taxable amount is reduced if you have substantial business mileage. You must travel at least 5,000 business miles and qualify for the 70% rule as explained below. If you travel at least 15,000 business miles the taxable amount also reduces on a sliding scale reducing to a minimum percentage charge of 6% for employees who travel over 30,000 business miles per annum. In some cases the company car may not be available for the full tax year. If so the taxable benefit will be reduced subject to the rules explained below.

Original Market Value (OMV)

The Original Market Value (OMV) of a car is the price (including any duty of customs, duty of excise or valueadded tax chargeable on the car) which the car might reasonably have been expected to fetch, if sold in the State singly in a retail sale in the open market, immediately before the date of its first registration in the State or elsewhere. Original market value includes vehicle registration tax (VRT).

Annual Business Mileage

For the purpose of determining the correct business mileage, the total mileage for the year should be reduced by a minimum of 5,000 private miles. If private mileage is in fact higher then you must deduct the higher figure. The employer may accept lower levels of private mileage but only where documentary evidence can be provided in this regard by the employee to the employer. The weekly and monthly equivalents of 5,000 miles annual private mileage are 96 miles per week and 416 miles per month. It is also important to note that employees must keep detailed records of their business mileage which must be available for inspection by the Revenue.

70% Out of Office Rule

In the case of certain employees whose annual business mileage does not exceed 15,000 miles, the cash equivalent of 30% of OMV may be reduced by 20% giving an effective cash equivalent of 24% of OMV. This alternative basis is available where the following conditions are complied with.
The employee

  • works an average of not less than 20 hours per week.
  • travels at least 5,000 business miles per annum on the employer’s business.
  • spends at least 70% of his or her working time away from the employer’s premises retains a log book detailing business mileage, business transacted, business time travelled and date of journey, and the log book is certified by the employer as being correct.

Company Car not available for Full Year

Adjustments will be necessary where a car is not available for the full year, e.g. where

  • an employee receives a car after the start of the tax year, or
  • an employee gives up a car before the end of the tax year.

Equally an adjustment will be required where a car is for some other reason not available for private use for part of the tax year, for example, where an employee is working abroad for an extended period. In this case, a car provided to an employee will not be regarded as available for private use for that part of the year in which the employee is outside the State for the purpose of performing the duties of the office or employment, provided the following conditions are met:

  • The employee travels abroad without the car.
  • The car is not available for use by the employee’s family or household during the employee’s period of absence outside the State.

Vans

This applies to two seater jeeps, possibly cab crews and normal vans which we will now collectively refer to as vans. The rules regarding the Original Market Value (OMV) as explained above apply. However the multiplier used to calculate the taxable benefit instead of a 30% rate is a flat 5% rate for the years 2004 onwards. There will not be any benefit in kind if the van is necessary for the performance of the job, private use of the van is prohibited and the employee is required to keep the van at their residence and finally the employee must spend at least 80% of their time away from the work premises. The extent of business mileage is not relevant to the calculation and is ignored.

Pooled Cars & Vans

Many employees claim exemption from a Benefitinkind on the basis that they are driving a pooled car/ van. To qualify for this exemption the pooled car/van must be available to more than one employee and not generally used by only one employee. In addition any private use must be incidental to the business use and it must not normally be kept overnight at the home of any of the employees.

Accommodation

Where living accommodation e.g. house or an apartment is provided for an employee the taxable benefit in kind is either the rent paid by the employer for the accommodation or if the property is owned by the employer the taxable benefit is calculated as being 8% of the value of the property. However if the rental value of the property is less than this figure then the lower figure will be used. An exemption is available for employees who are required to live on a company premises as part of the job subject to various rules and conditions. This exemption is not available for company directors.

Furniture

Where an employer provides house furniture for an employee the taxable benefit in kind is at a rate of 5% of the cost to the employer of the furniture.

Preferential Loans

These are most common in the financial services industry and may be provided by financial institutions as part of an overall financial package for their employees.
There are two different types of loans attracting different rates of taxable benefit. The first is a loan for the purchase of your principal private residence referred to as qualifying loans and covers all loans re the purchase, improvement or repair of your private residence. All other loans are taxable at a higher rate of tax. The benefit in kind on either type of loan is calculated as a percentage of the average loan balance throughout the tax year. The percentage multiplier is set out just below.

 

For Home Loans 4%
All Other Loans 13.5%

 

While employees with qualifying home loans are taxed on a benefit in kind they are still entitled to claim the benefit of the normal mortgage interest tax relief for such loans. The deemed benefit in kind is treated as interest paid for the purposes of claiming mortgage interest relief. The tax relief due has to be claimed through your tax office.

 

Professional Subscriptions

The Revenue have now clarified the position regarding the taxing of Professional Subscriptions when paid for by an employer. From 2011 onwards annual membership fees of professional bodies will be taxable as normal income where the employer pays the subscription unless membership of the professional body is required for the job of the employee.

This means PAYE, PRSI and USC will be charged on professional subscriptions paid to professional bodies not required for the job. For example accountants or solicitors working in marketing and their employer pays their annual sub to the relevant professional body. In this case the sub paid is fully taxable.

On the other hand an accountant employed by a firm of accountants or a solicitor employed by a firm of solicitors is not taxable if their employer pays their sub to the relevant professional body.

 

Tax Free Benefits

These are a very rare thing but arise in different situations. There are two types of small benefits which can be given to employees free of PAYE/PRSI. The first is a long service award provided it is not paid in cash or vouchers. The value of the benefit must not exceed €50 for each year of service and can only be awarded tax free if the employee has at least 20 years service.

The second is commonly referred to as the Christmas Bonus. Following changes in Revenue practice employers may give a voucher to the value of no more than €500 to an employee free of PAYE/PRSI. The €500 limit is applied on a yearly basis per employee. Often used as part of a Christmas bonus for staff the benefit is worth €900 to an employee before tax and can save employers PRSI charges of circa €100. If the €500 value is exceed in any year then the total benefit is liable for tax. There is no exemption for the first €500.

No benefits arise for staff canteens in respect of meals provided free of charge or at a subsidised rate provided the canteen is available to all staff.
A very topical subject these days is the provision of Crèche/ Childcare facilities. For the year 2011 there is no exemption from BIK for the provision of these services to employees. These services will now be subject to income tax, universal service charge and employee’s PRSI. This benefit will also attract employer’s PRSI at a rate of 10.75%.

Up to 2010 where an employer provided these services either free of charge or at a subsidised rate no taxable benefit in kind  arose provided the facility complies with the Child Care (PreSchool Services) regulations 1996 and the employer was directly involved in the provision of the facilities either on his own account or jointly with someone else and the employer was responsible for the financing and managing of the facility or for providing the capital for the construction or refurbishment of the premises. This latter requirement also applies where the facility is provided by an unconnected person. This is in complete contrast to a situation where an employer either pays for the cost of or subsidises the cost of an independent facility for an employee. In this situation the cost to the employer is treated as a fully taxable benefit in kind for the employee.

 

See Also

BIK Tax Calculator

 See Also For More Specific Advice

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How to Calculate Your Rental Income

March 1, 2018

1 Identify Gross Rental Income

Residential property in Ireland is normally let on a twelve monthly basis by way of formal lease. This lease document is an important item for tax purposes as it shows what your gross rental income is for that particular period.
You ignore security deposits and do not include them as part of your rental income on receipt and do not treat them as an expense when and if refunding them. If you do not return a security deposit and use it to meet the cost of repairs then you should include it as rental income and claim a tax deduction for the cost of the repairs.
If your property is not let under a formal lease you should take into account the rents due to you for the period in question.

2 Identify Rental Expenses

Renting out a property is like running a business and most expenses incurred in relation to the property will be allowed for tax purposes either immediately against your rental income, over a period of years, or else against the sale of property if and when disposed of. Like a business your expenses must be divided into the following categories:

a. Tax Allowable Expenses for Immediate Claim

  • Interest paid on a loan for the purchase, improvement or repair of the property from the date of the first letting of the property. Note that for residential properties mortgage interest relief is only allowed provided the property is registered with the Private Residential Tenancies Board. This applies from the tax year 2006 onwards.
  • Tax relief is restricted to 85% of the allowable mortgage interest for residential properties for Tax Year 2018 (75% for 2017). From 1 January 2019 interest accruing on such loans is fully deductible as a rental expense.
  • Insurance of Property and Contents.
  • Certain Mortgage Protection Policies.
  • Repairs.
  • Agents letting and rent collection fees.
  • Property Management charges.
  • Professional fees including the paylesstax.ie membership fee.
  • Legal fees for lettings and rent collection.
  • Head rent paid on a lease or ground rents paid in respect of the let property.
  • PRTB registration fee but not the NPPR levy.
  • Any other expenses not covered above which are not capital expenses.

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An area that is often overlooked by investors is the personal costs incurred in dealing with tenants and in collecting rents e.g. motor and travel, phone calls etc. This can be a contentious area with the Revenue as there is no specific tax allowance for these. However, in practice the Revenue will allow some reasonable level of costs if they can be justified in your own particular circumstances. For example if you have one property and the rents are paid by direct debit it would be hard to justify a claim for personal expenses for dealing with the letting. On the other hand if you have multiple units and have to collect weekly rents from tenants then a claim could be made for expenses incurred in doing so.

TAX SAVING TIP

A claim for the cost of mortgage protection policies is another area that is often overlooked. The cost of the premium can be claimed as a tax deduction against the rental income provided it is a death only policy linked to your mortgage with no other benefits attaching.

b. Tax Allowable Expenses Allowed over 8 Tax Years

The cost of the fit-out of the property e.g. furniture, electrics etc is allowed for tax purposes over a period of eight years at a rate of 12.5% per annum. This is known as a Wear & Tear Allowance.

TAX SAVING TIP

In addition to the expenses listed above, when you purchase a property it may include certain fixture and fittings, which will qualify for the tax Wear & Tear allowance. This is particularly applicable to new properties and refers to built-in furniture e.g. wardrobes, press units etc, central heating, security systems and sanitary fittings. The cost of all these items should be identified for you by the Vendor and you will be entitled to claim a tax allowance thereon against your rental income over a period of eight years. This area is often overlooked by investors.

c. Non Allowable Expenses against Rental Income

(i) Pre First Letting Loan Interest
Loan interest incurred prior to the first letting of a property is not an allowable tax deduction. This problem only arises on commencement, and normal vacant periods between lettings in the future do not reduce allowable loan interest claims.

(ii) Capital Costs of Acquiring Property
The capital costs of acquiring a property are not an allowable tax deduction against rental income. This relates to the actual cost of the property, legal fees, stamp duty etc. However, refer to our post on Special Tax Reliefs for Property Investment for details of tax allowances for certain properties, e.g. Section 23 Properties.

(iii) Loan Interest
For the tax year 2006 onwards all residential properties must be registered with the Private Residential Tenancies Board to qualify for tax relief on mortgage interest. You will need to retain proof of the registration of the property for inspection by the Revenue if required. This will be a specific request of all Revenue Auditors examining somebody with rental income. Late registrations are accepted by the PRTB, provided you still have the same tenant. Every letting of the property from the 1st January 2006 must be registered.

Loan interest for the purchase, improvement or repair of a rental property qualifies for tax relief. The type of finance chosen at the commencement of the mortgage needs to be carefully considered. Interest-only loans and pension-backed mortgages are very useful methods of minimizing your tax liabilities over the term of the loan. Professional advice on this area should be sought before committing yourself to any mortgage. We can provide advice on this matter by way of consultation.

Where a 100% loan has been used to acquire an investment property, the Revenue have expressed the view that tax relief is only allowed on the part of the loan used to pay for the property. If borrowings have been used to pay stamp duty and other costs it is their view that no tax relief is due thereon. The rules regarding allowability of interest as a tax deduction are very narrow and this would need to be borne in mind when dealing with 100% loans.

Replacement loans are another area where problems can arise with the Revenue. Strictly speaking there is no tax relief for a replacement loan if a property is refinanced. However in practice the Revenue will allow tax relief for replacement residential loans provided the refinancing is for bona fide commercial purposes and not part of a plan to avoid tax. For commercial property loans Revenue clearance should always be obtained in advance of a refinancing of an existing loan to ensure that tax relief will be allowed on the replacement loan.

From the 7th April 2009 to December 2016 tax relief is restricted to 75% of the allowable mortgage interest for residential properties.

For tax year 2018 tax relief is restricted to 85% of the allowable mortgage interest  for residential properties. From 1 January 2019 interest accruing on such loans is fully deductible.

(iv) Improvements v Repairs to Rental Property
Improvements to the property which do not qualify as repairs are not an allowable tax deduction against rental income, whereas repairs are allowable. This can be a very contentious area and sometimes there can appear to be very little difference between what is a repair and what is an improvement. As a rule of thumb a repair simply corrects or replaces what was already broken or in need of repair whereas an improvement could be replacing something with a completely new item e.g. converting a house into separate apartments. The most common type of house repairs would be as follows:

Painting and decorating both internal and exterior
Damp and rot treatment
Mending broken windows, doors, furniture and appliances
Replacing roof slates

(v) Capital Expenditures on Rental Property
As already mentioned, capital expenditure is not an allowable tax deduction against rental income, e.g. extensions/conversions.
Any expenditure on a property which is treated as capital expenditure for tax purposes will be an allowable capital gains tax deduction when the property is sold.

You don’t need to spend hours searching for answers with our intuitive Irish Tax Return software.

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See Also

Rental Income Tax Questions

February 27, 2018

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What Steps Can Be Taken to Avoid Inheritance / Gift Tax Liabilities

August 19, 2015

Advice in advance is the only way to plan for this tax in the hope of reducing future liabilities or else providing funds in a tax efficient manner to meet the liabilities that fall due.

Here are some useful tips in this regard:

  • Take advantage of the special relief for residential property transferred to children.
  • Gifts made during your lifetime will reduce the value of your estate and reduce inheritance tax liabilities. However when you make a gift you are treated as disposing of an asset for Capital Gains Tax purposes and you must compare the Capital Gains Tax liability with the Gift Tax liability. In certain circumstances both Capital Gains Tax and Gift Tax can arise. In addition Stamp Duty may arise thereon.
  • Including children in the purchase of investments at an early stage ensures that they share in the growth of the asset thereby reducing their future benefit. This involves using up the tax-free threshold during your lifetime so that future increases in equity accrue to your children.
  • You can defer tax liabilities for as long as possible by leaving all of your assets to your spouse if you are married and your spouse in turn then leaves all assets to your family. This takes advantage of the tax exemption for transfers between spouses.
  • Use special Life Assurances policies that will pay out on your death to meet any inheritance tax liabilities that may arise. The value received is not treated as part of your estate.
  • Plan the transfer of your business to your family once you reach fifty-five years of age and take advantage of the special retirement relief from capital gains tax and also the very significant reduction in value for gift tax purposes of the business assets. This can be done without you losing control of the business.
  • When making gifts or inheritances to married children note that sons-in-law / daughters-in-law are strangers for tax purposes and only qualify for the lowest tax free threshold of €15,075.
  • Spreading out the benefits of your assets to your children, sons-in-law / daughters-in-law and grandchildren where applicable ensures a greater number of tax free thresholds when calculating the tax liability due.
  • Every year children can receive a of €3,000 from each parent. This is a useful way of gradually reducing your assets that might otherwise be liable for tax.

We can provide specific advice on any of these matter by way of consultation.

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