Property rental companies may fall within the Taxes and Consolidations Act 1997 definition of an Investment company if they own more than one property. There are some long standing guidelines that have been handed down through case law over the years on how much you pay your company directors and also avail of a tax deduction against corporation tax.
In this blog post, we will look into the details of these guidelines and how they apply in practice.
Definition of an Investment company
We opened this blog post by showing how rental property companies can fall under the definition of an investment company if they hold more than one property. Furthermore, if the rental property company has just one single property but also hold other classes of investment assets such as quoted shares, cryptocurrencies, bonds, etc, then it will also be regarded as an investment company.
These other investments can be disregarded when determining if the company is an investment company or not, if such investments are only nominally small amounts.
Why this definition in the previous section is so important, is because “Revenue takes the view that directors’ remuneration in property rental companies is an admissible deduction to the extent that it is reasonable having regard to the services rendered or the duties performed.
In practice no objection will be raised to payments that do not exceed 10% of the gross rents.”
There is however leeway to increase this to 15%, but only where the director devotes a substantial amount of their time to the maintenance/management of the property. This however, will only be valid in situations where there is also no management fees going through the company.
Any amounts paid to directors in excess of these guidelines, will not be admissible as a deduction against corporation tax.
This is just another thing to consider when assessing the pros and cons of buying a rental property through a limited company.
What about a company with a mix of rental and other investment income?
Where the income of an investment company includes rental income to which the 15% limit would be applicable, the 15% limit will be applied to the rental income only and the 10% limit will be applicable to the other income of the company.
Revenue has supplied an example of how you should calculate the admissible tax deduction in these situations:
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.