This has come about in part due to a lack of understanding about tax and the full cost of the investments they were getting involved with. On many occasions down the years, I had clients applying for a mortgage for a RIP (Residential Investment Property) and they told me that the 30 year mortgage repayment is €1,200 pm and they get that in rent, “it wipes its own face” so the investor just waits a few years for the house price to go up and they then cash in. But this was never the case.
A 30 year mortgage on €250,000 at 4% gives a monthly repayment of approx €1,190, of which €830 is interest. This means that a higher rate tax payer would be taxed at 41% on the €360 pm capital prepayment. That means a €1,770 pa tax charge.
€360 X 12 X 41%= €1,770
It should be noted that this is in year 1, as you repay the mortgage over a number of years, you repay part of the capital and therefore reduce the portion of the repayment that is interest and increase the capital portion. This means that over time the tax charge increases.
Since the 2010 budget this tax charge has been magnified as the tax relief on the interest portion has been reduce from 100% of the interest to 75%.
In the example above this would increase the tax due to €2,790. Investors are now experiencing reduced rental income and reduced profits from their business, add to this increased tax, property owners are now finding it difficult to manage their loan repayments.
This scenario has left financial advisors looking for different ways to help their clients manage their investments.
One possible solution to deal with the cash flow and tax issues that result from the property portfolio is the use of an SPV (Special Purpose Vehicle).
An SPV is a service company established to hold the property assets. After setting up the company, the assets would transfer in to the company. The purpose of this is to reduce tax and increase your ability to service loan repayments. As mentioned a mortgage repayment for an individual attracts a tax liability on the portion of the capital repayments and 25% of the interest. In the SPV, the full rent could be used to repay the mortgages, Gross of tax. This makes the servicing of the loan more manageable.
The company directors could grant an option to repurchase the asset in the future, at today’s price, which would be a benefit if the asset price recovers and grows in value in the future.
• The transfer of the assets might attract stamp duty or VAT, the effects of would have to be compared with the possible benefit to you. The recent changes in stamp duty in the 2011 budget should make this a more attractive solution.
• Banks may not favour a transfer of the assets to a limited company and may not agree to the transfer. They will no doubt, require personal guarantees. It would be advisable to have a professional negotiate this on your behalf.
This is a sample of the solutions that may help those in difficulty with under-performing assets, it is wise to seek professional advice as early as possible rather than putting it off and risking reducing your options.
Buyers Broker Whelan, Dublin 2
Tel: 01 4428 035 or 085 1374 027 for any more information on SPV’s