Housing investor - Is it worth paying off capital duty?

A capital contribution (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. It 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.

The shareholder is exempted from the capital contribution by paying off his share of the house loan, i.e. 'paying off the capital contribution'. The decision must balance, among other things, the differences between the capital gains tax and the funded capital gains tax, the own financial situation for other unexpected expenses or attractive investments, and the impact on the resale value of the dwelling. For the landlord or housing investor, the income and capitalisation will affect how the capital charge will be reflected in tax and finances, and whether it is worth paying it off.

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 company loan taken out by a housing company for major purchases. 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.

Acquisitions include, for example, plumbing renovation, façade renovation, lift installation and conversion to geothermal heating. In contrast, in the case of new housing, the capital charge is due to the long-term loan that made the building possible in the first place. A building society loan can therefore be an outstanding loan from a previous loan and/or a new loan for future projects.

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. These, plus any other charges or 'special charges', together make up the general partner's contribution, which may include other charges payable by the shareholder to the housing 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 landlord-tenant exemption only applies if the leasehold plot is "optional", i.e. the tenant can pay off/cancel his/her share of the loan if his/her financial situation allows.
The company contribution is made up of the sum of different contributions - usually just the management contribution, the capital contribution.
Other charges will be billed separately from the rent, if charged by the housing company, such as water, parking or broadband charges.

Amount of capital contribution

The amount of the building society loan, the interest rate and the terms of the loan determine how much each shareholder pays in capital contributions each month. The building society or the shareholders voting at the general meeting decide on any changes to the payment schedule, such as repayment holidays, which can temporarily lower the monthly charges (by paying only interest) but extend the loan period.

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.

Calculation of the capital charge

To calculate the capital charge, you need to know the amount of the loan, the term of the loan, the interest rate and the number of shares in the entire housing company. In practice, the calculation of the capital charge works like this:

Know loan amount (€), loan period (years), interest rate (%), number of shares in the whole housing company
Calculate the annual repayment (the amount of the loan in euros divided by the duration of the loan)
The interest rate is divided by 100 to be used in the calculation
The annual interest rate is calculated by multiplying the amount of the loan by the interest rate
The annual repayment and interest for the entire housing company are added together
Calculate what the cost per share is
The capital charge for a single apartment is calculated by the number of shares in it, or alternatively by the number of square metres

An example of the calculation of a capital charge:

500 000 € loan, 20 years loan period, 4% interest, 5000 shares in the housing company, 100 shares in the apartment in question
Annual repayment = €500 000 / 20 years = €25 000
Interest rate = 4%, i.e. 0.04 digit is used to calculate the interest rate
Annual interest = 500 000 € × 0,04 = 20 000 €
Amortisation and annual interest for the housing company = €25 000 + €20 000 = €45 000
Cost per share = Capital contribution/share = 45 000 € / 5000 shares = 9 €/share
Apartment capital charge = 100 shares × 9 € ÷ 12 months = 75 €/month

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

Capital charge may be raised by the housing company

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.

The capital charge can also be reduced by the housing company

The building society can reduce the capital charge through its own internal measures, decided by the general meeting or the board of directors.

Competing for loans can reduce the capital charge if the housing company is able to negotiate better loan conditions, such as lower interest rates. This is particularly relevant when market interest rates are falling. However, in practice, loan tendering can be difficult or limited because housing companies' loans are often tied to existing contracts between banks and financiers.

Increasing and making efficient use of building societies' savings can help reduce the need for loans. In practice, this may mean that a housing association can adopt the principles of financial planning and contingency planning, but the growth of savings is slow and this may not be a quick way to significantly reduce capital constraints. Building societies' own funds may also be limited, depending on the size of the society and its financial situation.

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Recognition, funding and taxation of capital gains and losses

The accounting treatment of the capital charge (income vs. reserve) affects the financial situation of the owner of the home - tax, cash flow and capital gains tax. It is therefore worth taking into account when planning to pay off the mortgage, when leaving the capital charge unchanged, or when buying a house. The general meeting decides each year whether to cash in or fund the capital reserve, based on the financial needs of the housing company, long-term plans and possible future investments.

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.

How do I know if the capital tax has been refunded?

This is how you know whether the capital (financial) charge has been recovered:

Building society accounts: the building society's accounts should show how the financial contribution is treated. If the financial contribution is recognised as income, it is often shown in the profit and loss account or as separate entries explaining the use of the contribution and its recognition as income.
Minutes of the general meeting: the general meeting can decide how to deal with the financial contribution. If the meeting has discussed the recovery or use of the financial contribution, this will be recorded in the minutes.
Landlord's certificate: the landlord's certificate often indicates whether the capital charge is paid or funded.
Separate accounting entries: if the financial liability has already been recognised as income, it may appear in the accounts as a separate item or income. For example, 'recovery of financial liability' could be a separate item of income.
Landlord or board of directors: if you can't find the answer in the above documents, you can ask the landlord or the board of directors. The property manager can check whether the financial contribution has been paid and provide more detailed information.

If a capital charge is not yet recovered, but is to be, it may be recorded in the accounts as a contingent asset or provision and not yet reflected in the profit and loss account.

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 (for the shareholder):

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 income tax offset allows the owner to benefit from tax deductions in the short term, which can improve the owner's cash flow, as tax deductions can reduce taxable income. However, it is important to note that the funds go to taxes and are not "released" to the shareholder.

Benefits (for the housing company):

Flexibility in financing needs: the liquidity provided by the income release allows the housing company to react quickly to unexpected expenses and new investment opportunities.
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 finances, improving the financial transparency of the housing company.

Risks (for the shareholder):

Higher taxable capital gains: as the gain does not increase the purchase price of the share, it may increase the capital gains tax on the sale of the home.
Short-term tax benefit, long-term risk: short-term tax deductions can be an advantage, but the increase in the value of the home may result in higher tax at the time of sale because the purchase price has not increased.

Risks (for the housing company):

Missing buffers: income recognition can weaken the building society's ability to prepare for future investments, which can lead to additional payments to the building society's shareholders in the future. This is a significant risk as the cash flow of the housing association may be limited if there are insufficient funds set aside for future major renovations.
Tax planning challenges: income recognition requires careful financial planning so that potential taxable gains do not surprise you at the time of sale. This is a challenge for a housing association, as poor tax planning can lead to unexpected costs and tax consequences.

The benefits and risks of a funded equity participation

Benefits (for the shareholder):

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 the need for separate financing later on. This provides financial stability and allows for planned financial management.
More attractive in a sales situation: a higher purchase price can make a home more attractive to buyers who value careful management and a stable financial situation. This can make it easier to sell the home if the shareholder decides to sell.

Benefits (for the housing company):

Fiscal predictability: funding brings stability to a housing company's finances, as tax fluctuations are not as large from year to year. This helps the housing association to plan and financially prepare for future investments.

Risks (for the shareholder):

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. This can create financial challenges for the shareholder, especially if funds are needed immediately.
Long payback period: as the tax benefits are only realised at the time of sale, the tax deductions only come in the long term, which may be less attractive for a short-term investor. The shareholder does not receive an immediate benefit from the fund.
More difficult to assess the selling price of the home: a higher purchase price may affect the valuation of the home in the event of a shareholder's sale, as buyers may notice the higher purchase price and draw their own conclusions about the value of the home. This may affect the ability of the shareholder to sell the property at the expected price.

Risks (for the housing company):

Committed funds: the funds are tied to the future investments of the housing company and cannot be used flexibly for other investments or unexpected expenses. This can limit the financial flexibility of the housing company and its ability to react quickly to changes or new needs.
Market risk: if a home is sold in a downturn, a higher purchase price may not necessarily lead to the desired sale price. This may reduce the returns and financial situation of the housing association, especially if the housing market deteriorates.

Income recognition vs. funding - which is in your best interest?

For investors and landlords, income recognition is generally better because it allows for immediate tax deductions on rental income, which improves cash flow and short-term profitability.

‍For house flippers funding may be more profitable because it increases the purchase price of the share and reduces the taxable capital gains on the sale.

‍Funding can also be a good option for owner-occupiers, as it allows the housing company to prepare for major renovations without separate financing, but does not directly affect the tax-free capital gain if the dwelling has been occupied for at least 2 years.

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Is it worth paying off capital duty?

Paying off the capital premium can be a major financial decision for a home investor, flipper or homeowner. It affects monthly expenses, taxes 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.

Homeowner: Being debt-free can be financially rewarding and bring peace of mind, especially if you plan to live in your home for a long time and have cash reserves for unforeseen expenses.
Housing flipper: full withdrawal is generally not recommended because it ties up money that could be used for renovation or other items.
Housing investor: a full withdrawal is not optimal, as the money you spend on withdrawals could be more profitable in other investments. In addition, keeping the loan may offer tax benefits.

The monthly payment of a capital charge is justified in order to maintain financial flexibility and take advantage of tax deductions.

Homeowner: If you value financial flexibility, it may make sense to continue paying the capital contribution.
Housing flipper: As a flipper, paying down the equity is not a big concern, as the main focus is on quick cash flow and completing projects before a large amount of equity has been accumulated up front. Homeowners looking for a home can decide for themselves whether and how much to pay off the principal, as long as you make this clear in the negotiations of the home deal.
Home investor: continuing to pay monthly can make sense in the long run, as it allows for tax deductions on rental income and preserves cash for investment.

Partial withdrawal offers a compromise that allows to benefit from lower monthly costs while maintaining liquidity and a partial tax advantage.

Homeowner: A partial withdrawal can help reduce your monthly costs and give you financial flexibility. You can maintain liquidity and still make progress on your debt payments.
Home flipper: A partial withdrawal can be a good choice because it preserves liquidity and gives you flexibility when financing new projects. At the same time, it can reduce your monthly expenses.
Housing investor: a partial withdrawal can be a sensible compromise, as it preserves liquidity and brings tax benefits, but does not tie up too many funds. This can give you more financial flexibility.

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Once you've paid the capital down payment, it's worth patching up the dent in your wallet with a steady income by getting a stable tenant. Rent your property to businesses easily and securely through Immodan.

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