Your questions: Can I cut my tax bill if I set up as a limited company?
Published 19/01/2014 | 02:30
I set up my own business as a sole trader recently.
I got a shock when my accountant advised me about the amount of tax I would need to pay. Could I lower my annual tax bill if I set myself up as a limited company -- and what other advantages does a limited company have over a sole trader?
Eamon, Ranelagh, Dublin
You will indeed pay a lower tax rate on your profits if you trade through a limited company. For most trades, a tax rate of 12.5 per cent must be paid -- the exception being certain land dealing trades. This is significantly lower than the amount of tax paid by individuals, which can go up to 55 per cent when you include the Universal Social Charge and PRSI.
There is a catch, however. The lower tax rate of 12.5 per cent is paid on the company's profits -- but that money belongs to the company. You may need to take part of this out as a salary, in which case you will end up paying a similar income tax rate as you have in the past. However, if this money is left in the company to finance working capital, the corporate tax rate of 12.5 per cent applies.
The other advantage of a company is the protection of limited liability. The shareholders of a company cannot be held liable for the debts of a company. Therefore, if your business is a risky business and could fail because of poor trading or because of some disaster such as a large lawsuit against the company, then it is safer for you to trade through a limited company. That way, your personal assets (your house, most likely) cannot be at risk if the company fails.
An exception to this rule is where a person agrees to be responsible for the company's liabilities. This happened a lot during the boom where banks required individuals to give personal guarantees for company borrowings. Many individuals regretted this subsequently because they had to personally inject funds to cover the liabilities of their companies.
QI am hoping to leave my home to my son when I die. The house is worth about €500,000. My accountant has advised me that my son will not be eligible for the dwelling house tax exemption, which would allow him to inherit the home without having to pay any Capital Acquisitions Tax (CAT). My son is currently unemployed and on the dole. What will happen if he is not able to pay the CAT bill due on my home when he inherits it?
Teresa, Howth, Co Dublin
AYour son will have to pay about €90,000 tax on his inheritance -- assuming that he has not had any gifts or inheritances before. If your son has genuine difficulties paying a tax bill, he could strike a deal with the Revenue Commissioners where he repays the bill over an extended period of time. However, this probably would not work for your son because the Revenue will, sooner or later, require the tax -- together with interest if it is not paid on time. If your son cannot pay, it is unlikely that he will ever be able to, so Revenue could take action against him and this could lead to the sale of the house.
Another option is that your son could sell the house immediately, pay off the tax bill and pocket the rest of the sale proceeds. If he does not already have accommodation, the money will help him to buy a smaller house or apartment.
To avoid dwelling house tax exemption, your son would need to live in the house for three years (without you living in it at the same time) before he gains ownership of the house. It might be possible for you to leave the house to a relative, such as your husband, who would allow your son to live there for three years before the house passes to him. There are other conditions which must be met for your son to qualify for the exemption, so best to get some specific advice here.
Michael Gaffney, author of 'Tax Advice for Irish Family Businesses', is a tax adviser and a partner with KPMG.