Can I minimise my tax exposure on the sale of a small commercial property?
What are my options? How do I get the property out of a company structure?
Question: I have a small commercial office property that was purchased through a limited company many years ago. I understand that there could now be tax drawbacks if I were to sell either the property or the company containing the property. What are my options? How do I get the property out of a company structure? Can I just liquidate the company? There is a small loan against the property.
What is the best course of action to minimise the potential tax exposure?
Answer: We have outlined below the options available to you.
1. Commercial Property Sale by the Limited Company
A liability to corporation tax in the form of a chargeable gain arises upon the sale of an asset when the proceeds (less incidental costs of sale) are greater than the original purchase price (adjusted for inflation plus purchase costs). Based on the assumption that the value of the commercial property exceeds the cost, a liability will arise on a sale by the company at a rate of 33 per cent.
Once the corporation tax has been paid on the chargeable gain, the residue cash arising from the sale will remain in the limited company. When extracting these funds, a further charge to tax will arise to the shareholder (“you”). The charge to tax will depend on whether the proceeds from such a sale are distributed upon a subsequent liquidation of the company, or as a dividend.
A dividend will result in the residue cash being taxed in your hands at your marginal rate of income tax (max 55 per cent).
A liquidation will result in the residue cash being taxed in your hands as a capital gain, subject to Capital Gains Tax (CGT) at a rate of 33 per cent, once all creditors are repaid (including the small loan).
GT Retirement Relief may be available to you if certain conditions are satisfied. If available, this would significantly reduce the CGT liability.
It should be noted that retirement relief in this instance will only be available where cash is distributed to you rather than a distribution of the assets. As a result, if the commercial property was distributed directly, the relief would not be available.
Should the above not be available, CGT Entrepreneurial Relief may be available if the relevant conditions are met. The relief provides a reduced rate of CGT of 10 per cent on a lifetime limit of €1 million. Based on the current CGT rate of 33 per cent, this provides you with a maximum saving of €230,000.
2. Direct sale of Limited Company Shares
A liability to CGT arises upon the sale of shares when the proceeds (less incidental costs of sale) are greater than the original purchase price of the shares (adjusted for inflation plus purchase costs). Based on the assumption that the value of the shares exceeds the cost, a liability will arise on a sale by the shareholder at a rate of 33 per cent.
Retirement Relief and Entrepreneurial Relief may also be available to you in respect of the disposal of shares subject to certain conditions.
In summary, a share sale is likely to minimise the potential tax exposure as there will only be one charge to tax rather than two, with reliefs potentially available in relation to same. However, this option is dependent on whether a willing purchaser is available.
On the other hand, a sale of the commercial property by the company, with a subsequent distribution to you, or indeed a liquidation scenario will result in two charges to tax.
For the purpose of answering your questions, we have assumed that the company is a trading company. It should be noted that the above does not consider the Value Added Tax on property rules or Stamp Duty implications. Further advice should be sought in relation to this transaction.
Niamh Horgan, Tax Manager, RSM Ireland, rsm.global/ireland