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.
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.
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.
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.