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Thursday 26 April 2018

Financial Advice: Proceed with caution on car and jeep finance deals

The financing options for vehicles can be bewildering
The financing options for vehicles can be bewildering

Martin O'Sullivan

If I had a euro for every time I have been asked by clients about the best way of financing a vehicle and the tax benefits of same, I would have accumulated a tidy pile at this stage.

While motor vehicles can be tax allowable against farm profits, the amount of relief can vary with the type of vehicle and in the case of cars, the emissions class and the level of use for the farm business.

However, for the mere mortal, determining the amount of tax relief available is far from straight forward.

The financing options available for vehicles can also be a bit bewildering, particularly if you leave it in the hands of the motor dealer to attend to your finance needs.

In this article I will attempt to guide readers through the various financing options and explain the tax treatment of purchasing cars and jeeps.

FINANCE OPTIONS

Generally cars and jeeps are financed by way of Hire Purchase Agreement, Personal Loan, Personal Contract Plan (PCP) or outright cash purchase. Leasing is not now generally offered as a finance option for motor cars.

Irrespective of how one finances a vehicle, the tax relief as outlined above will be the same with the possible exception of PCPs.

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Personal Loans

Banks, finance companies and credit unions offer personal loans. Personal loans can be more expensive in terms of interest charges, typically 7-13pc.

When you take out a loan, you may be offered payment protection insurance (PPI), but this is not obligatory and depending on your circumstances may not be warranted.

Personal loans from banks and Credit Unions will generally be variable interest rate which enables one to pay the loan off at any stage without penalty.

Some lenders (but not Credit Unions) may charge an administration fee. One of the advantages in favour of personal loans is that generally they do not require security and you own the vehicle from the day you buy it.

Hire Purchase

Many car finance loans offered by garages are actually hire purchase agreements.

Hire purchase is different from a personal loan because you don't own the car until you have made the last repayment. So check what you are being offered first and know what you are signing up to.

Currently, many main agent car dealers offer very attractive finance deals at low interest rates which presumably are subsidised by the car manufacturers.

All of the main banks and finance companies offer hire purchase finance whether it be directly through the branch or through car dealers, but check out the interest, administration and completion charges as there are huge variations and there can be scope for negotiation.

Personal Contract Plans

More commonly known as PCPs, this is another finance offering designed to make repayments less painful on new vehicles.

As they say, 'there are no free lunches' and all you are doing is deferring some of the loan until the end of the contract period at which point you can pay off the balance by way of a single 'balloon payment' or hand the car back subject to you meeting certain conditions that are set down at the start of the contract.

Alternatively you can enter into a new contract for a new car but you are starting from a weaker position than you did with the first contract as the equity in your car has been much reduced if not eliminated.

Similar to hire purchase, you don't own the car until the contract is fully completed. With a PCP, payment is broken down into three parts:

A deposit - 10-30pc of the cost depending on the provider. The deposit can be cash or a trade in.

Repayment term - at least three to five years.

Guaranteed Minimum Future Value (GMFV) - this amount is set at the start of the contract and assuming you observe certain mileage and condition criteria, will be available at the end of the contract to meet the final payment. If the car achieves a price in excess of the GMFV, the excess amount can be refunded or put against the deposit on a new contract.

PCPs do not really make an awful lot of sense for people who have alternative sources of finance available to them.

They appear great when one is driving the vehicle out of the garage but not so great at the end of the three or five-year contract when the day of reckoning arrives.

TAX RELIEF

Tax relief on the cost of cars first registered on or after July 1 2008 depends on the emissions category. Cars in categories A,B and C can be written off for tax purposes over eight years (12.5pc of the cost per year) but subject to a maximum allowable cost of €24,000 regardless of whether the vehicle cost considerably more.

Categories D and E are restricted to 12.5pc of 50pc of the cost of the car subject to a maximum expenditure of €24,000.

Categories F and G will not attract any tax relief on the purchase price. In addition to the restrictions mentioned above, there is also a restriction to reflect personal use.

This will vary depending on the level of use. For example, if there is no other vehicle, be it a car or jeep being used for the farm business, well then the restriction is likely to be only 25pc.

If, however, the car has limited farm use because there is another vehicle in use on the farm, the restriction may be higher depending on the level of use.

There is no restriction on claiming tax relief on the cost of commercial jeeps as the use of such vehicles is, strictly speaking, confined to business use. Furthermore the €24,000 upper limit does not apply. The case studies below illustrate the level of tax savings available on cars and jeeps.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie


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