Housing investor - Is it worth paying off capital duty?

A capital contribution, also known as a financial contribution, is a payment made by the shareholders to cover the repayments and interest costs of a loan taken out by a housing company. Its amount varies according to the terms of the company loan, the interest rate and the duration of the loan. It has a significant impact on your finances, whether you are buying, selling or renting your home. Understanding the principles of equity release will help you make better decisions as a shareholder, whether you end up paying it off in full, in part or not at all.

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The capital contribution is waived by paying off your share of the house loan. The decision must balance, among other things, the differences between the income-based and the funded capital contribution, your own financial situation, the amount of cash you have available for other attractive investments, and the impact on the resale value of the home. In particular, income and capitalisation will affect how the capital charge will be reflected in the shareholder's finances and taxes, and whether it is worth paying it off.

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In this article, we will go through what capital duty means and how it is determined. We will assess whether it is worth paying off your share of the mortgage in one lump sum, in part, or continuing to pay your current capital contribution every month. Read our advice to make a decision based on your individual situation, to protect your finances and maximise the return on your investment.

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What is a capital contribution?

A capital charge, formerly known as a finance charge, is a charge levied on shareholders to pay off a loan taken out by a housing company for major purchases. These include, for example, plumbing repairs, façade renovation, installation of lifts and conversion to geothermal heating. The capital charge consists of a monthly repayment plus interest, and you only pay it if:

The building society has taken out a loan in the first place, and you have not paid off your share of it in full.

A building society loan can be a previous outstanding loan, and/or a new loan.

The capital contribution is therefore a key payment in the financial management of a housing company, because without it it would be difficult to finance major renovations or other expensive projects. For shareholders, it represents an additional cost alongside the management charge, but on the other hand, carefully executed renovations maintain or increase the value of the home in the long term.

Capital contribution vs corporate contribution vs management contribution

You only pay a capital contribution if the housing company has taken out a loan and you have not paid off your share. Maintenance contributions, on the other hand, are always paid to cover the running costs of the housing company, such as maintenance and cleaning. Together, these make up the association contribution, which may include other charges payable by the shareholder to the association.

The management fee covers the daily costs of the property (heating, waste management, cleaning, property tax, etc.).
The capital charge (financial charge) covers the repayments and interest on the housing company's loans.
The company contribution consists of the sum of the management contribution and the capital contribution
Other charges are billed separately from the general contribution, if charged by the housing company, such as water charges, parking fees or broadband charges.

This is how the capital contribution is determined

The size of the building society loan and the terms of the loan determine how much each shareholder pays in capital contributions each month. The board of directors or the general meeting of the housing company decides on any changes to the payment schedule, such as repayment holidays, which can temporarily lower the monthly costs (by paying only interest) but extend the loan period.

Tip: As a shareholder, you should monitor the financial situation of the housing company and attend general meetings, as these can affect the profitability of paying off your share of the housing company loan.

Calculation of the capital charge

These factors affect the amount of the capital charge:

Loan amount: the total loan of the building society is divided between the shareholders.
Loan duration: the repayment period (usually 15-25 years) affects the monthly instalment.
Share of the apartment in the company loan: based on the number of shares or the surface area.
Repayment method: the monthly payments are affected by whether the loan is an annuity or a straight loan.
Interest rate: the reference rate (e.g. Euribor) and the bank's margin determine the cost of the loan.

Most building society loans are tied to a variable interest rate (e.g. 12-month Euribor), which means that the consideration can increase as interest rates rise.

An example of the calculation of a capital charge:

Annual repayment = €500 000 / 20 years = €25 000
Annual interest (4%) = €500 000 × 0,04 = €20 000
Annual cost = 45 000 €
Capital contribution/share = 45 000 € / 5000 shares = 9 €/share
Capital charge on the apartment = 100 shares × 9 € = 900 €/year (75 €/month)

Increase in the capital charge over time

Many people wonder whether the capital charge can go up, and the answer is yes. The building society may decide to repay the loan faster or make additional repayments. Planned renovations, such as plumbing or facade renovations, may require new loans.

Most famously, the level of interest rates affects the amount of the capital charge. A corporate loan is usually linked to a variable interest rate, such as the 12-month Euribor.

An interest rate cap or interest rate hedge can protect against unexpected interest rate rises.
Rents can be raised moderately to cover rising costs.
Anticipating different scenarios of interest rate rises helps in financial planning.

Preparation of a payment plan for a capital charge

A well-designed payment plan helps an investor to anticipate future expenses and manage cash flow.

Key steps in a payment plan:

Loan terms: find out the term of the loan, the interest rate model and the repayment method.
Monthly impact assessment: calculate the impact of different interest rates on the return on investment.
Preparing for rising interest rates: make scenarios of possible changes in interest rates.
Comparing payment options: weigh up the advantages and disadvantages of paying the loan instalment as a lump sum or monthly.
Tax effects: tax deductions and capital gains tax are affected by the recognition of income and the use of reserves.

Recognition, funding and taxation of capital gains and losses

The accounting treatment of the capital premium (income vs. reserve) affects the financial situation of the owner of a residential property. It is therefore worth taking this into account when planning to pay off the mortgage, when leaving the capital charge unchanged, or when buying a house. The general meeting of the housing company decides each year whether the capital reserve should be paid out or reserved.

Recognition of income from capital charges means that the charges paid are recognised as income in the profit and loss account of the housing company.
Capitalisation means that the consideration paid is entered in the balance sheet of the housing company and does not appear as income in the profit and loss account. This choice has a direct impact on the taxation of the shareholder and the economic value of the dwelling.

You can check the processing method from the following sources:

The accounts of a housing company:some text
- The capital gain recognised is shown in the profit and loss account in the "income" section.
- The funded consideration is shown in the balance sheet as an increase in equity.
Landlord's certificate:some text
- The certificate often indicates whether the capital contribution is paid or funded. This is particularly important to check before buying a home.
The landlord or the board of the housing company:some text
- If the information is not clearly stated in the documents, ask the landlord directly.

Calculation of tax deductions carried forward

Recognised capital allowances are tax deductible in the same way as other rental-related expenses. The tax deduction is made in the year in which the consideration is paid.

An example of a tax deduction:

Rental income: €900/month → €10 800/year
Capital gains tax: 200 €/month → 2 400 €/year
Taxable income: €10 800 - €2 400 = €8 400
If the tax rate is 30%, the tax saving would be €720 per year (€2 400 × 30%).

Important to note:

The deduction can only be made for the months rented.
The deduction is made on a pay-as-you-go basis, i.e. in the tax year in which the capital tax is paid.

The benefits and risks of an income tax deductible capital charge

Benefits:

Direct tax deductions: income tax deductions for capital gains can be deducted directly from rental income, reducing taxable income and improving the short-term profitability of the investment.
Improved cash flow: the payout allows flexible use of investment assets without committing them in the long term.
Easy monitoring: the fees received are shown in the profit and loss account of the housing company, which makes it easier to monitor expenses and manage your finances.
Flexibility in funding needs: the liquidity provided by the bail-in allows you to react quickly to unexpected expenses and new investment opportunities.

Risks:

Higher taxable capital gains: the gain does not increase the purchase price of the share, which may increase capital gains tax on the sale of the home.
Short-term tax benefit, long-term risk: tax reductions are achieved in the short term, but at the time of sale the tax may be higher if the property is appreciating.
Missing buffers: income recognition can weaken the building society's ability to prepare for future investments, which can lead to additional payments in the future.
Tax planning challenges: income recognition requires careful financial planning so that any taxable gains do not come as a surprise.

The benefits and risks of a funded equity participation

Benefits:

Less tax on capital gains: funded capital gains increase the purchase price of a share, which can reduce the taxable capital gain on the sale of a home.
Long-term financial planning: financing allows you to plan for future renovations and investments without having to finance them later.
More attractive in a sales situation: a higher purchase price can make a home more attractive to buyers who value careful housekeeping.
Fiscal predictability: funding provides stability because there are no tax fluctuations from year to year.

Risks:

No immediate tax deductions: funded capital liabilities are not immediately deductible from rental income, which can increase taxable income and reduce cash flow in the short term.
Tied funds: the funds remain tied to the housing company and cannot be used flexibly for other investments or unexpected expenses.
More difficult pricing in a sales situation: a higher purchase price can make it more complicated for the buyer to estimate the total price of the home.
Long payback period: as tax benefits are only realised at the time of sale, income recognition can provide faster cash flow benefits in the short term.
Market risk: if a home is sold in a downturn, a higher purchase price may not necessarily lead to the desired sale price.

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Revenue recognition vs. funding - summary

For investors and landlords, income recognition is generally more advantageous because it allows for immediate tax deductions on rental income. For house flippers and owner-occupiers, it may be more advantageous as it reduces taxable capital gains on sale.

For investors and landlords, income recognition is generally more advantageous because it allows for immediate tax deductions on rental income.
For house flippers and owner-occupiers , it may be more profitable as it increases the purchase price of the home, which reduces the capital gain and thus the taxable capital gains on sale.

Is it worth paying off capital duty? How to make the right decision

Paying off the capital premium can be a major financial decision for an investor or homeowner. It affects monthly expenses, taxation and investment strategy. The decision is influenced by many factors, including your own financial situation, interest rates and the prospects for your home.

In this section, we look at the impact of a capital withdrawal and help you assess whether it is worth paying off the loan or continuing to pay it off each month as a consideration.

Full waiver of capital duty

Paying a capital contribution all at once can make sense if your aim is to reduce your monthly outgoings, achieve a stable financial situation and enjoy the peace of mind that comes with being debt-free. If you can answer the following questions in the affirmative, please consider paying off:

Do you want lower monthly expenses?
Being debt-free removes the capital risk and can make it easier to plan your finances.
Do you plan to keep your home for a long time?
For long-term ownership, a loan repayment can provide financial security and predictability.
Are interest rates on the rise?
Rising interest rates can make your monthly loan repayments significant.
Do you have extra capital available?
If you can pay off the loan without compromising your other financial goals.
Want to sell your home debt-free?
A debt-free home can be more attractive to buyers and simplify the sale.
Are the housing company's future financing needs low?
If no major renovations are planned, it may make sense to tie up extra capital in the home.

Continued payment of the capital charge

It may make sense to continue paying the capital charge on a monthly basis if you want to maintain financial flexibility and take advantage of tax deductions. Please consider continuing if you answer the following questions in the affirmative:

Want to keep your capital available for other investments?
Monthly payments preserve liquidity for other needs.
Are you taking advantage of tax deductions on rental income?
Recognised capital gains tax reduces the tax payable on rental income.
Is the interest rate affordable?
A low interest rate can make it financially viable to pay the loan every month.
Are you planning to sell your home in the near future?
A debt-free home can be competitive on the market when the buyer can choose to pay the loan in instalments.
Does your housing association have future renovation needs?
Major renovations can affect loan financing and fees.

Partial waiver of the capital charge

A partial exit tax can provide a balanced solution between cash flow and tax benefits. Consider a partial exit tax if you answer the following questions in the affirmative:

Want to reduce your monthly outgoings but maintain liquidity?
Partial payment reduces the consideration but leaves funds for other investments.
Looking for a balance between tax benefits and financial security?
Part of the consideration is still tax deductible.
Do you have doubts about rising interest rates?
You can pay off part of the loan to manage the interest rate risk.
Do you still have doubts about keeping your home in the long term?
Partial payment offers flexibility for future plans.

Conclusion - is it worth paying off capital duty?

Considering whether to pay a capital contribution requires careful thought, taking into account your financial situation, investment plans and tax implications.

A full waiver of the capital charge can be a good solution if your goal is long-term financial stability, lower monthly expenses and the peace of mind that comes with being debt-free. This option is particularly suitable for those who want to minimise loan servicing costs and ensure the ease of selling their home debt-free.

The continuation of the payment of the consideration is justified in order to maintain financial flexibility and to benefit from tax deductions. This option is well suited to investors who want to optimise cash flow and reallocate capital to other investments.

Partial withdrawal offers a compromise that allows to benefit from lower monthly costs while maintaining liquidity and a partial tax advantage. This solution can be useful, for example, in a situation where interest rates are rising but you want to preserve investment funds in other assets.