The Pros & Cons of Buying A Rental Property Through a Limited Company in Ireland

Are you thinking of investing in a buy to let property and unsure where it is more tax-efficient to buy it personally or through a limited company?

In this blog post, we will take you through a practical example and show you what are some of the pros and cons of each scenario.

On the face of it, you would think that it would be much more tax-efficient buying a rental property through a limited company due to the favourable corporation tax rates in Ireland of 25% ( non-trading income rate) compared to personal income tax rates which can reach marginal rates of 52%. This will not always be the case for several reasons.

Lets have a look at some examples:

Buying a property as an individual – example

Property Cost €350,000

Gross Annual Rental Income €21,600 (€1,800 p/m)

Allowable expenses €2,000

Net Taxable Income: €19,600

Personal Income Tax: €19,600 * 52% = €10,192

(Note if you income total income from other sources is greater than €36.8k your marginal tax rate is 48%, rising to 52% on all income above €70k)

Net Rental Income after tax: €9,408

Buying a property through a limited company – example

Property Cost €350,000

Gross Annual Rental Income €21,600 (€1,800 p/m)

Allowable expenses €2,000

Net Taxable Income: €19,600

Corporation Tax: €19,600 * 25% = €4,900

Profit After Tax: €14,700

Once you make a profit in a company you have two choices with what you can do with those profits. A) Pay the profits out as dividends, or B) leave the profits to sit in the company.

A) If you go with this option you as an individual will be liable to further taxes on the dividend income which are taxed at your personal income tax rates which again can be as high as 52%.

Therefore, if the remaining profits were all paid out as dividends you may pay further taxes up to €7,644 (€14,700 *52%).

This would then leave you with a true net income of €7,056.

B) If a company leaves profits sitting there for 18 months and are not paid out as dividends then the company will have to pay an additional close company surcharge of 20% on the excess

The purpose of this surcharge is to discourage the practice of allowing passive non-trading profits of close companies to accumulate to try and avoid higher income tax rates.

Undistributed reserves in this case are €14,700 which are now taxed at a further 20% equal to €2,940. This leaves post tax reserves in the company of €11,760.

Comparison of the 3 scenarios

The amount you are left with after tax as individual was €9,408 compared to that if you had bought the property through a company and paid out the profits as dividend – €7,056.

If however, the reserves were not paid out as dividends to the shareholders of the company and left in the company reserves. The company would be left with €11,760 which is more than the other scenarios.

The downside of this is as soon as you try to access this cash as a shareholder you will have to pay further personal income tax.

Also if you decide to live in the property which is owned by the company, this would be considered a benefit in kind.

The benefit of leaving these reserves in the company is that they can be built up at a fast rate if your strategy was to use the rental income of one property to eventually buy another property.

We will cover the capital gains tax implications of disposing a property held by a limited company in another post.

This post is for informational and educational purposes and is not to be construed as financial advice.

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