Personal Debt

I currently operate a retail business through my own family company. Five years ago I personally purchased the company’s current shop premises, at a considerable cost and now have a large personal debt that requires servicing. This has put an increased strain on my company as I withdraw funds to meet the requirements of this loan. Can you offer any advice?  

Unfortunately, your story is a common one inIrelandtoday. Many people made investments during the Celtic Tiger years in a rising property market. Now as income levels reduce, it has become very difficult to service these debts. Especially, as the sale of the property is no longer always possible or desirable due to significant negative equity. Obviously the sale of the property in question in this instance was never a consideration, given its importance to your company’s business. That being said, in the challenging retail environment currently in place inIreland, the strain of servicing the debt is now likely to be placing undue hardship on the company.

Another factor in relation to drawing down money from the company to fund your own personal debt is the income tax burden that is befalling you in relation to same. Whether you take the extra money required to service the debt from the company in the form of salary, rents or dividends Income Tax at the marginal rate will apply. Quite simply this is unsustainable in the current market place.  Once the marginal Income Tax band is passed you will be in essence taking €2 from your company to service every €1 of the debt is question. As a result of this, it is worthwhile considering whether it is possible to restructure your financial affairs to reduce the tax leakage arising from paying down the debt. This will in turn improve the company’s own cash flow position. 

There are options now available to you to help remedy this situation in the short and medium terms. In the short term it may be possible to restructure the bank loan to allow for interest only repayments in the coming years until both you personally and your business are in a stronger position to service both interest and capital repayments.

A more long term solution may be to transfer the property and the attaching debt into the company itself to prevent the income tax leakage which is currently occurring.

Clearly, the consent of the bank to the proposed transfer will be required. However, it could be argued that the position of the bank is strengthened significantly as your overall ability to repay the debt will be enhanced. It is important to note that any such transfer may have Capital Gains Tax, Stamp Duty, Capital Acquisitions Tax, VAT or Income Tax implications. For this reason it is advised that a high level tax review of your particular circumstances is undertaken before any transfer takes place. If structured correctly however it is likely that the benefits of the transfer will outweigh any potential tax costs.

If you have any further queries in relation to the tax consequences of any potential transfer, please do not hesitate to contact RDA Accountants’ Tax Manager George Skelton CTA, ACA, MBA at our Wexford office for further assistance.