The taxation of property transactions

Property transactions give rise to any complex and high risk tax problems. The common problems that we are qualified to deal with include:-

• Modelling tax outcomes to determine the appropriate holding stucture for acquisitions for SME owned businesses,
• Reviewing exposure to VAT for sellers and purchasers on the lease and sale of commercial and residential property,
• Strategising to access corporate cash to acquire property personally via a hybrid investment structure or similar arrangement,
• Implementing strategies to avoid the close company surcharge on rental income,
• Defending challenges by the Revenue Commissioners in relation to development land.

Among the routine issues we also encounter are the operation of relevant contract (withholding) tax, avoiding the close company surcharge, maximising loss relief in relation to debt write-downs, CGT disposal planning and more.

Property transactions trigger VAT, income tax, coporation tax, CGT and stamp duty.

In the short to medium term, the main objective of planning is to reduce the rate of exposure to corporation tax and income tax. Rental income in Irish resident companies is often liable to a close company surcharge which increases the effective rate of tax to 40%. Rental income earned by individuals is liable to income tax, PRSI and USC of up to 52%.

A corporate structure with planning elements will provide the optimum short to medium term return on investment by structuring income to avoid the surcharge and possibly access the 'trading' rate of corporation tax, 12.5%.

The downside with any corporate structure is exposure to a double charge to tax; tax at corporate level on disposal of the asset and tax at shareholder on ultimate extraction of sale proceeds.

Tax modelling allows an assessment to be made of the full range of tax exposures arising. This is extremely helpful to understanding which type of structure is appropriate in any given situation.

Having the right financing and ownership structure is critical to maximising the rate of return on any investment.

The appropriate tax strategy will blend efficiency with commercial objectives. SME businesses may be concerned with asset protection where as large and MNC businesses may wish to leverage assets. Strategies which we give advice on include:-

• Opco/PropCo structures,
• Offshore investment structures,
• Corporate v personal holdings,
• Acessing corporate reserves to fund personal acquisitions without triggering tax at shareholder level,
• Accessing 12.5% rate of corporation tax on certain letting types, and

Irish personal holding companies, onshore & offshore passive investment structures, family partnerships, real estate investment trusts and joint ventures are some of the options worth considering.

Using inhouse software, we model to extremely high accuracy the optimum investment structure appropriate to each situation.

Quite often, the VAT issues arising on a property transaction are left unaddressed until the last minute putting agreements at risk and leaving sellers potentially exposed without any legal recorse. Examples of issues we often deal with include:-

• Failure to operate VAT on sale of residential property by builders after periods of letting,
• Exposure of owners to VAT clawback for failing to charge VAT on rent to their own business,
• The sale of property by individuals with pre-July 2008 waivers of exemption,
• Liabilities triggered by agreeing to certain assignments and surrenders,
• Settlements caused by a failure to obtain legal consent of tenants and purchasers to charge tax on lettings and sales, and
• Legal settlements in relation to rent arrears.

In relation to general VAT management, most property owners are unaware of the requirement under VAT law to track VAT recovery and property usage for up to twenty years. The Law Society's standard contract for the conveyance of property requires detailed information disclosures and financial guarantees by purchasers (see here). Failing to maintain contemporaneous records can delay - or potentially frustrate - the sale of commercial property.

Having an expert identify the VAT history of an asset is critical to avoid recoverability or Revenue exposure issues.

Relevant Contract Tax (RCT) is a significant real-time withholding tax applied to subcontractors in the construction sector.

Dealing with RCT in real-time requires a good understanding of this complext tax area. Inevitably issues can arise which require expert advice to resolve with the minimum of exposure. Examples of issues we deal with include:-

• Resolving issues with the Revenue Commissioners to access 0% rate of withholding,
• Identifying contracts and activities which are subject to RCT,
• Management of contract, site number, payment, post-payment and other notifications and related returns,
• Negotiation of penalties for unreported payments,
• Registration of non-resident subcontractors for VAT, RCT and corporation tax.

Failure to operate the system properly leads to large penalties and audit settlements.

The regime applies to Irish and non-Irish resident companies. It is complex and the obligations under the scheme are numerous.