Significant Tax Savings on Property Transfers

Posted in Good Advice, Income Tax, Tax Saving

If you personally own a commercial property and are renting it to your company, with the recent decline in property values and interest rates it may be in your interest to consider transferring it to the company together with any related bank borrowings thereon. From my experience this may result in significant savings for you and your company.

An example will give you an indication how this can be done.

Tom is the owner of a company (HCO) which is part of a group which holds a trading company and has a positive net worth. Tom also has significant personal borrowings on a building he acquired at the height of the property boom which borrowings now exceed the value of the property. The current value of the property is significantly less than the acquisition cost. Tom’s current repayments of principal and interest to the bank mean that he has to draw significant rent from the trading company to fund the bank repayments at a time when bank interest rates are very low. Consequently Tom has a significant annual income tax bill on his profit rent for which he does not have sufficient personal resources to pay.

It is proposed that Tom restructures his bank debt to allow for a more tax efficient repayment of same. The restructuring will occur in the following order:

  1. Tom will incorporate a company (Newco) and himself and his wife will be directors of this company.
  1. Newco will purchase shares in HCO from Tom and at the same time Newco will purchase the building held by Tom.
  1. Using the proceeds of the sale of shares and building Tom will repay his existing debt to the bank.
  1. To repay the bank debt funds will be provided to Newco from the trading company over time.
  1. The above transactions should have no tax consequences for Tom.

The restructuring of the debt as outlined above should avoid the need for Tom to withdraw funds from the trading company to repay the capital element of the debt. This will give rise to significant tax savings.

With any structuring involving an element of tax mitigation consideration should be given to the possible impact of tax anti-avoidance provisions. Each case must therefore be looked at separately and proper advice taken before entering into such a transaction.

Please contact Noel Murphy to discuss this matter further.

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