Reducing tax on rental income

Wexford96

Hi.

I make a salary of 50k per year in Ireland and have rental income of 32500 here. I find that all of my rental income gets taxed at the higher rate (+40%) as salary and rental income pushes me up to +80k income. Previously employed overseas, and the rental income was taxed at a lower rate as it was my only income here.

Could I set up a company and call it a property investment company? Then my company would be charged at lower rate of tax and my salary would be a separate income? Is this something people do to avoid big tax bill every year?

Thanks. 

Fian

If you do this (sell the property to a company) then the company would indeed be charged a lower tax rate on it's profits than you are charged on your income.

Unfortunately you will pay CGT on the sale at teh current market value of the property (so you can't get away with selling at an unreasonable undervalue.)

The company will be taxed at 12.5% on profits but any money the company passes on to you will be charged as income, so at your marginal tax rate. Cumulatively this means a higher tax burden when you extract money from the company to spend.

When the company eventually sells it pays CGT at 33% and then when it passes money onto you you pay income tax on the income.

There is a reason why everyone isn't doing this, even when the arrange for companies to purchase in the first place to avoid the initial CGT hit. Company will pay less tax than you do, but when you add both sets of taxes the overall hit is higher.

REITs are another story ofc, but even so you are paying income tax on the distributed income. If you were tax resident abroad a REIT would probably make perfect sense.

kheb

To add to the above, rental income is taxed at 25% in a company and the close company surcharge will bring it to to be in effect 40% if the income is not distributed so there is very little advantage if any, in moving the property to a company.

Wexford96

Very thorough info, thanks very much.

Mrs OBumble

Contributing as much salary as you can to an approved pension is the easiest way to reduce your tax. What % of your earned income you can contribute depends on your age.