Q I own a company which owns a rented retail unit worth approx €500,000. I want to give this property to my son but I don’t want him to have to pay cash into the company for it. What are the tax implications of this?
A. As you and, by extension, your son, are connected to the company, everything is deemed to happen at market value regardless of whether cash is paid or not. Therefore, transferring property out of a company has a number of tax implications, particularly where your son does not pay the company for the market value of the building.
Firstly, if the current market value of the building is more than what the company originally paid for it, corporation tax at 20 per cent is payable on the difference, with some allowance for inflation since the company bought it and for the cost of making any significant improvements to the property. Costs of sale and acquisition, such as stamp duty, legal fees, etc. are also deductible.
Secondly, if your son does not pay market value for the building, he will be regarded as having received a gift of it and will be subject to 20 per cent capital acquisitions tax (CAT ). Although the gift is coming from the company, the Revenue takes a look-through approach and deems the shareholder(s ) as being the provider of the gift. Therefore, it is deemed to have come from you. A child can receive almost €525,000 from a parent before paying tax on a gift so if the value of the property is €500,000 and he has not received any other gifts of benefits from either of his parents to date, no CAT should be payable. If he has received prior gifts from a parent and the tax free threshold is exceeded, CAT will be payable on the excess.
Thirdly, your son will have to pay nine per cent stamp duty on the value of the property he receives.
Lastly, as the company is owned by fewer than five persons, it is a “close company” for tax purposes. There is anti-avoidance legislation which deems the value of the property going to your son to be a distribution or a dividend to him. The company would have to withhold 20 per cent withholding tax and pay this to Revenue within 14 days of the month end in which the transfer happens. Income tax will also be payable by him at 41 per cent plus PRSI/levies on the amount of the distribution, with credit for the tax withheld.
A further point to note is the company law issues regarding dealings in company assets with directors/shareholders. You need to ensure that the company is not infringing any company law rules in making the transfer, such as making a distribution where there are insufficient distributable reserves.
As you can see, transferring property out of a small privately owned company can be a costly affair. However, sometimes the tax cost can be outweighed by the benefit of your son being given a valuable building, which is providing him with an income stream. On a future sale, his base cost will be today’s market value, €500,000, even though he paid a lot less for it. All future growth in value will accrue in his name and only be taxed once when he sells it, unlike when property is owned by a company and two charges to tax arise on a sale: first, tax on the gain when selling the property and second, when extracting the sales proceeds out to the shareholders.
There may be ways of reducing the tax cost and you should seek tax and legal advice before taking the property out of the company.