Buying a Rental Property Through an Individual or Limited Company in Ireland
Joe Murphy
Managing your retirement should be simple. I help clients control their past work pensions, consolidate their savings, and build their pension funds for the future.
Investing in a rental property can be a lucrative venture, but deciding whether to purchase it personally or through a limited company is often a question I am asked. In this blog post, we will delve into the pros and cons of each scenario, using practical examples to help you make an informed decision.
At first glance, buying a rental property through a limited company may seem more tax-efficient, thanks to Ireland's favorable corporation tax rates. Be aware that rental income is not taxed at 12.5% though. Rental income is deemed as non-trading income and has a tax rate rate of 25% , But this compared to personal income tax rates that can go as high as 52% seems favourable. However, this is not always the case, and there are several factors to consider.
Picture this: You're standing at the crossroads of taxation, pondering which path to take. On one side, there's the allure of favorable corporation tax rates, set at a reasonable 25% for non-trading income in Ireland. On the other side, personal income tax rates loom large, reaching as high as a staggering 52%. Decisions, decisions.Let's explore some examples:
Buying a Property as an Individual:
Property Cost: €300,000
Gross Annual Rental Income: €25,000
Allowable Expenses: €2,000
Net Taxable Income: €23,000
Personal Income Tax: €23,000 * 52% = €11,960
Net Rental Income after Tax: €11,040
Buying a Property through a Limited Company:
Property Cost: €300,000
Gross Annual Rental Income: €25,000
Allowable Expenses: €2,000
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Net Taxable Income: €23,000
Corporation Tax: €23,000 * 25% = €5,750
Profit After Tax: €17,250
Once you earn a profit within a company, you have two options for handling those profits:
A) Pay the profits out as dividends.
B) Leave the profits within the company.
A) If you choose to pay the profits out as dividends, you, as an individual, will be liable for additional taxes on the dividend income. These dividends are taxed at personal income tax rates, which can reach as high as 52%. If all remaining profits were paid out as dividends, you might end up paying additional taxes up to €8,970 (€17,250 * 52%). This would leave you with a true net income of €8,280
B) If the company retains the profits without paying them out as dividends for 18 months, an additional close company surcharge of 20% on the excess will be imposed. The purpose of this surcharge is to discourage the accumulation of passive non-trading profits in close companies to avoid higher income tax rates. In this case, the undistributed reserves amount to €17,250, which will be subject to a further 20% tax, equal to €3,450. This leaves the company with post-tax reserves of €13,800.
Comparison of the Three Scenarios:
Now, let's compare our three scenarios:
But remember, accessing those retained reserves as a shareholder incurs personal income tax. Oh, and if you decide to live in a property owned by the company, that's considered a benefit in kind. Keep those details in mind.
The advantage of leaving reserves within the company is the potential for rapid accumulation, fueling your dreams of expanding your property portfolio. It's like building a treasure chest to fund future investments.
The downside of retaining these reserves within the company is that accessing this cash as a shareholder would incur further personal income tax.
You mentioned taking the profits out as dividend bit what about taking a salary? This would reduce the profits unlike a dividend and avoid paying tax on both the profits of the business and the dividend.