Paying back director Loans with property

[zguy27]

My property investment approach is a seperate issue from Ltd co/tax etc... but

In essence I would rather buy 10 x £40k flats (£400k) giving me a total of £50k per per in gross rent (12.5%) rather than 1 x £400k in London giving me rent of £20k per year (5% If I'm lucky.) As an example; the last property I bought has a yield of 18% - got rented the day I bought it.

My family have been involved in property for decades and this is the way they've all done it and got quite good at it ; concentrating on yield and ROI rather than capital appreciation. We don't care about capital appreciation at all. In fact I would like property prices to fall even further (as it would allow me to purchase more.) Renting to low income households is a niche by itself, but we do it fairly well - it's not for everyone. True, I wouldn't want to live in many of the properties in some areas I have, but people do and as long as the property is well maintained then they're happy. (no boilers gone missing yet...)

There are some portoflio lenders out there that lend to Ltd companies for BTL; don't need any loans for it just now but by the time I do I'll probably have another year of accounts.

[northernladuk]

Even though I own quite a number of properties; I concentrate on low value and high yielding properties for the most part; hence I have never yet reached the SDLT threshold for any of my properties I've purchased. So I'm nowhere near as big as I sound with "many properties."

Does that mean renting tulipholes to students, the great unwashed and the like and not spending any money on upkeep? I have lived in digs with landlords like you as a student... lol

[northernladuk]

I can get lending on property through my ltd company to allow me to purchase more property through my Ltd company; yes the interest rate will be a little higher but as I work off such high yields; I still have plenty of profit margin left..

Mind me asking how you will do this bearing in mind your LTD is only a year old and you have a 25% tax to pay? Doesn't leave a lot?

Also what is the point if you admit that there will be no profit to pay CGT? No profits but you buy a new one every so often? But surely you are going to lose 20% on CT and then on tax to get it out the company when you sell?

I have a number of properties so I can see where you are coming from, particularly with ltd money doing nothing and housing stock going up.. but it just doesn't sit right at all.

Anyway, the sooner you speak to your accountant the better. We obviously don't have a clue about your situation or how to help.

[stek]

My mate bought a shed load of lower end properties in Staleybridge to rent out every year he had to fork out for a new boiler or even a hot water tank more than once cos the scrotes lifted them, did a runner and never paid the rent.

£2k a pop...

He ended up auctioning the houses off at pretty significant loss.

[zguy27]

I've thought about most of the downfalls you guys have rightly mentioned before I thought of this idea.

Even though I own quite a number of properties; I concentrate on low value and high yielding properties for the most part; hence I have never yet reached the SDLT threshold for any of my properties I've purchased. So I'm nowhere near as big as I sound with "many properties."

CGT will be minimalistic/nil as the properties I transfer over to the company are the properties I've had for many years and would today not be valued for much more/anything more than I purchased them for (certainly not in real terms anyway)

Professional fees are minimalistic as my brother is also my lawyer.

The properties I will transfer have no lending secured on them.

I can get lending on property through my ltd company to allow me to purchase more property through my Ltd company; yes the interest rate will be a little higher but as I work off such high yields; I still have plenty of profit margin left.

Rent is VAT exempt as is providing medical services (and loans too I presume.)

I am concentrating on cashflow rather than capital appreciation and will re-invest every single penny of my property profits; I will always (hopefully) be a highest rate tax payer for the rest of my life; I get to re-invest 80% of my property profits through a Ltd company, but only 50% of my property profits under my own name as in essence I will be paying 45%+ tax on any personal profits! Over decades; this will seriously add up.

[ASB]

In terms of repaying the loan through property I don't believe there is any specific issue. You could repay the loan with anything of tangible value, even buttons.

However it is the worth of those assets that is important, has to be a fair and justifiable market value.

Also it is going to be a disposal for CGT purposes. This will crystallise any CGT liability on the owners part. Stamp duty will of course be payable along with any relevant fees for land registry.

At this point the advance CT paid on the loan because it was over 5k should be reclaimed.

Dependant upon when the company was incorporated and the default contents of it's articles it may be restricted from owning property. Unlikely but possible. Easy enough to change via amendment any way.

Since the ownership of the property is changing there may be issues with anylending secured on it at the time.

But no, there is no fundamental issue in it. In effect their is an implied transaction converting the property into cash and crystallising any impacts that would occur as a result of that.

When discussing with your accountants if it turns out it might have been better for the company to own the property itself (doubtful but depending upon your circumstances possible) you might be able to hypothesise this by postulating that you were in effect acting as trustee. It will be an interesting chat, but beneficial and legal ownership are different things.

If it's a long term thing in the likely length of the loan I would have though the advance CT consideration on the loans from the company and the ongoing interest would outweight any possible advantage.

[Clare@InTouch]

Serious understatement here. You should have spoken to him way before you got the idea in your head because you may not like what he has to say if you have convinced yourself.

I strongly agree with this. You should always talk to your accountant before you do something, not tell them after and still expect them to be able to magic things into being as tax efficient as possible. They can then review and give advice before you do something, when you still have the ability to do things in various ways. It's often too late to change the substance of something afterwards - horses and stable doors spring to mind.

[northernladuk]

As all my rental profits are re-invested (and always will be); I would rather have my properties through a limited company where I can re-invest profits at a 20% tax rate as opposed to 45+%. Yes I'm aware its not quite as simple as owning properties through a personal name, but I think it's much better for the long term game. Professional fees will be minimal and so will SDLT (relatively low value properties up north!) CGT will also be nil or very minimal.

Why do you think CGT will be minimal? What about the tax on the profit when you sell the properties? Tax on the income from the rent and VAT?

I really need to get on to my accountant about this; he wasn't too concerned when I said I wanted to take money out and start buying properties in my own personal name; but my first year end is just approaching so will have a proper sit down with him then.

Serious understatement here. You should have spoken to him way before you got the idea in your head because you may not like what he has to say if you have convinced yourself.

I was under the impression that if my Ltd company is a "jack of all trades" which I want to run it as (medical work, investments, loans, shares etc....) then I could charge myself interest at say 5% and not have to pay any additional tax on the directors loan? ie my Ltd company would be in the business of lending money etc... Supposedly all new Ltd companies (like mine) articles of association are very wide so companies can do pretty much what they want?

And this is where your accountant may deliver you the bad news. You company has to be classified as something and now it could be a medical co, a property one and a loan one. Affects the VAT rate at least, dunno about anything else but needs considering.

Also did you read up on Section 455 tax I linked earlier... Here is a quick article about it...

HM Revenue & Customs: Directors' loan accounts and Corporation Tax explained

https://www.gov.uk/directors-loans

I think you need to do a lot more research and speak to a professional.

[Scruff]

I would suggest that if you have "so many properties", the potential for limiting exposure in your trading (personal service) company, the doubling of Stamp Duty, the VAT, commercial mortgages (high %) and inflexibility to liquidate would steer you towards a specialist Tax advisor. The realms of discretionary Trusts come into play here and its worthwhile taking professional advice from suitably qualified professionals.

Most planning advice here is given by laymen (-women), the booze afflicted and IR35 geared Accountants.

[b0redom]

Don't forget you'll end up having to charge VAT on your rentals, which will jack up the price to the end customer by 20%. You might not be as competitive as you think.

[zguy27]

As all my rental profits are re-invested (and always will be); I would rather have my properties through a limited company where I can re-invest profits at a 20% tax rate as opposed to 45+%. Yes I'm aware its not quite as simple as owning properties through a personal name, but I think it's much better for the long term game. Professional fees will be minimal and so will SDLT (relatively low value properties up north!) CGT will also be nil or very minimal.

I really need to get on to my accountant about this; he wasn't too concerned when I said I wanted to take money out and start buying properties in my own personal name; but my first year end is just approaching so will have a proper sit down with him then.

I was under the impression that if my Ltd company is a "jack of all trades" which I want to run it as (medical work, investments, loans, shares etc....) then I could charge myself interest at say 5% and not have to pay any additional tax on the directors loan? ie my Ltd company would be in the business of lending money etc... Supposedly all new Ltd companies (like mine) articles of association are very wide so companies can do pretty much what they want?

[Maslins]

You'll need to properly think through the implications of you transferring the property to the company.

Legally speaking you'd first be buying the properties personally, then selling them to your Ltd Co. Hence two sale/purchase transactions, so two sets of stamp duty/legal fees. If properties are below the stamp duty threshold and you can get a decently priced lawyer then perhaps not a massive deal.

Also the mortgage will be in your name...I doubt you'll be able to transfer the property to the company without repaying the mortgage first (otherwise you'd have a mortgage against a property you no longer own), and I doubt they'd let you transfer the mortgage to the Ltd Co.

...but yes, you can transfer an asset to the company to reduce your directors loan account. In effect the company is buying the property from you, but instead of it physically giving you cash, it reduces the loan it owes you.

[northernladuk]

You are going to also have to think about the different trades through your limited and may have to start another one up if you have as many as you indicate. I presume your LTD business is classed for your doctors work so depending on the number of properties you may need to re-classify your LTD. One for your accountant I think.

[northernladuk]

Hey guys,

I'm working through a Ltd company for now and I'm withdrawing money from my Ltd company account into my personal account and purchasing property with it every few months. So basically I'm taking out a directors loan that allows me to purchase property through my own personal name. I'll need to pay interest on this loan amount to my Ltd company to keep it all above board which is fine.

However; I do need to pay my company back the principal at some point. Do I have to pay it back with cash or can I transfer a property to my Ltd company? For instance; say I have taken out a £100k directors loan, can I continue to pay interest on it and in a few years - transfer one of my properties worth £100k to my company to clear the outstanding directors loan?

Due to the amount of properties I own; it will be much more beneficial in the long term to have them in a Ltd company anyway (I'm not asking whether it's better to buy investment property through a personal or Ltd company as I know that Ltd co works best for my situation in the long term)

Sorry to ask but do you fully understand directors loans? I mean the s455 CTA 2010 tax at 25% (reclaimable) and the fact they have clamped down heavily on bed and breakfasting?

Has your accountant looked over your plans? I can't see the point transferring the property to the co as it will then be liable for all kinds of taxes when you let it and come to sell it. On the whole property is best kept out of the companies books. You sound like you may have already done your sums though.

I am surprised that the LTD works best, particularly for the long term as you cannot shut it down if you need to and make use of other tax breaks. I know it isn't really out business but this doesn't sound quite right to me.

[zguy27]

Hey guys,

I'm working through a Ltd company for now and I'm withdrawing money from my Ltd company account into my personal account and purchasing property with it every few months. So basically I'm taking out a directors loan that allows me to purchase property through my own personal name. I'll need to pay interest on this loan amount to my Ltd company to keep it all above board which is fine.

However; I do need to pay my company back the principal at some point. Do I have to pay it back with cash or can I transfer a property to my Ltd company? For instance; say I have taken out a £100k directors loan, can I continue to pay interest on it and in a few years - transfer one of my properties worth £100k to my company to clear the outstanding directors loan?

Due to the amount of properties I own; it will be much more beneficial in the long term to have them in a Ltd company anyway (I'm not asking whether it's better to buy investment property through a personal or Ltd company as I know that Ltd co works best for my situation in the long term)