The 83 Vaci Street investment is structured to allow qualifying purchasers to make the
investment with tax relief at a rate of 58c on the Euro i.e. a €200,000 apartment will have
net cost after tax relief of €116,000
The following describes the investment mechanism.
Investment Proposal:
Investment Highlights:
- Each unit can be purchased via a self-administrated trust
- All Trust contributions can be offset against taxable income within the Revenue
approved funding limits. Transfers from existing policies can also be facilitated.
- Each unit will be purchased via a Hungarian Company, which in turn will be owned
by the investor’s self-administrated Trust.
- The investment is hands-off in all matters relating to the letting and management
of the individual apartments.
- Hungarian accounting and reporting will be handled locally at favourable rates.
Rent will flow from the Hungarian company back to the trust on a monthly / quarterly basis.
- All rents received will be structured in a tax-efficient manner to minimize local
Hungarian taxes and be used to service the borrowing in the purchasing Hungarian company.
- Any future disposal of the property within the Trust will be exempt from Capital Gains Tax.
- An Approved Retirement Fund option is available on retirement and provides inheritance
tax advantages.
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Investment returns:
Rental yields are projected to be between 4 - 5 % of the value of the property per year.
The primary motivation in making this investment is to capture the expected capital
appreciation Budapest should return over the next 7-10 years.
The following table illustrates a projected
return on an apartment costing €132,500.00 over a
10-year period.
The above assumes a rent of €5646 per year or €470 per month, 11% per year annual
appreciation, costs of fund of 4.25%, rental income from the apartment grows at 4% per annum.
The price of the apartment after the 10-year growth period is still less on a cost per
square meter basis than what would currently be paid for an apartment of similar size in
Ballsbridge or Merrion Square in Dublin 4 in 2004.
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Closing Costs:
- Closing costs will be 1% of the purchase price of the apartments plus masc.
outlay of Euro 500 to cover searches and contract translation services.
- Trust setup will be €3000.
- Closing costs and the Trust setup can be borne by the Trust, effectively
reducing the actual cost to 58c on the Euro.
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The Investment Procedure:
The following outlines the simple tax-efficient steps involved in making the investment.
- Self-administrated trust is formed - the trust forms the Hungarian company, which is done by the Hungarian Law firm acting
for the investors. The Irish self-administrated trust will own the Hungarian company.
- Irish self-administrated trust is funded via company director’s limited company.
- Irish self-administrated trust puts a loan agreement in place with its wholly Hungarian-owned company.
- Hungarian company purchases the property.
- Hungarian company receives rent from the property .
- Hungarian company uses rent yield to repay the Irish self-administrated trust loan.
Operation of the Hungarian Company:
An annual return will be required each year for the Hungarian company. Pentamix Tax Consultant
Ltd. will handle all accounting and annual reporting functions for the Hungarian companies that purchase the properties. The annual fee will be €900 per company.
Operation of the Irish Trust:
Investors will require an independent trustee and the trust will have to file an annual return
each year on the performance of the trust. ITC will handle the trust setup services, annual
returns and the actuarial report every 3 years for a fee of E900 per year.
Contributions:
The property is due to be completed by early July 2005. Payments are scheduled at 30%, 30%, 30% and the
remaining 10% on completion. All funds will remain in an Hungarian escrow account until final sign-off on
the completed building. On final sign-off, the funds will be transferred to the developer.
The investors will be treated on a first come, first served basis as demand is expected to be
significant for such a well–located property. While there is a minimum requirement to purchase one unit
in the development, investors can purchase more than one unit, or 2 investors could decide to co-invest.
Fees and Charges:
The purchase price of the property plus the closing trust setup costs reflects all of the purchase and
entry costs associated with the investment. The management charges for letting the apartment are as follows:
- One month's rent to find a tenant
- Annual maintenance fee of 10% of the total income from the property.
Note 1: There is no annual percent fee of the value of the building charged for fund
management purposes.
Note 2: The Trust setup fee is a one-off and can be used to make other tax saving
investments in Hungary or other countries. The Hungarian company can be used as a vehicle to acquire other properties.
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Exit Mechanisms:
By nature, property is a medium to long-term investment. It is ideally suited to pension fund
structures and can be retained after retirement in an Approved Retirement Fund structure.
Investors can sell their property at any time during the investment with no penalty or fund
charges, as this is a self administrated trust.
When the investor reaches retirement age, the asset can be sold or transferred to an ARF,
which will allow an income to flow from the property.
In the event of death, the value of the deceased person’s investment will be paid to the
investor’s estates or personal representatives. This treatment may vary between personal
pension and employer/employee schemes depending on how the structure is established.
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Financing
Raising funds in Hungary is difficult on a non-recourse basis which is a requirement
of trust based financing. There are a number of easy alternates available to investors.
- The director’s company makes a payment to the trust which in turn buys the property.
This payment is tax-deductible against corporation profits as a pension expense and the
director does not pay tax on the funding of the trust.
- The company director raises funds through equity release on an existing property; the
director make a directors loan to his company; the company repays the load over an agreed
period of time. The company make a payment to the pension trust which in turn purchases
the property. (The above are subject to Revenue approval and funding levels.)
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Property Management:
An agreement will be entered into with a professional firm of property managers to
manage the property in respect of all aspects relating to the property and control of
the tenants. This will remove the administration headache from the investors. The
tenants will not be know the identity of any individual investor.
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Taxation Issues:
All pension contributions will benefit from tax relief annually, subject to the individual’s
overall allowances and thresholds.
The eventual sale of the property should also be tax-free to the trust as it will be the Hungarian
company which owns the property that will be sold, and not the actual property.
The Hungarian company will be treated as an Irish based disposal from the trust; it will not be subject
to Capital Gains Tax.
The investment outlined in this document has been reviewed / agreed by Independent Trust
corporation Ltd.,which is a Revenue approved pension trustee.
Each independent trust set up to purchase the units in the development will have Revenue approval
prior to final signing of the purchase.
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Risk Factors:
The following list of risks is intended to highlight a number of issues associated with this
investment, which potential investors need to consider. This list does not purport to be
comprehensive.
- Interest Rates- as in all property investments, there is a certain level of exposure to
fluctuating interest rates. Interest rates are currently at historic lows, however interest
rates may rise in the future.
- Property Risk- as with any property transaction, values are impacted by matters such as
economic growth; fluctuation in property yields; tenant default; and interest rate movements.
Upon realisation of the investment, there can be no guarantee that the policyholders will
receive any money back into their pension portfolios. Pension contributions that have been
invested are also at risk, given the fact that the investment may be geared. Where any
property is vacant for any period of time, it will impact on the cash flow generated.
- Gearing Risk- Monies borrowed increase risk under such circumstances, and enhance
your returns where property values rise.
- Liquidity Risk– Property, by its nature, is a long-term investment, and investors are
therefore advised to take a long-term view of this investment opportunity. Where there is
a disposal, there will be the normal selling costs involved with an estate agent as well as
legal costs and other associated costs.
- Currency Risk– Movement in the Euro-Forint exchange rate will alter the value of the
underlying investment. Not, however, that this will be removed when Hungary joins the Euro.
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