Landlord sells high-rise flat to his trading Ltd Co

An existing client contacted us looking for help in selling one of his personally owned rental properties to his trading limited company. The client is a self-employed IT consultant who also owns several buy to lets.

Over the last two years his limited company, from which he runs the IT business, has been making an excellent profit which had allowed him to pay himself a salary that had pushed him into the higher rate tax bracket.

As a result, his accountant had advised him that, going forward, it would be more tax efficient if his company owned his rental properties rather than him continuing to own them personally. (From 2017 tax relief on finance costs, including mortgage interest, will start to be restricted and by 2020 it will be capped at the basic rate (20%) regardless of which tax bracket the taxpayer falls into. Property owned by limited companies, on the other hand, will not be subject to these restrictions.)

Technically speaking, this meant that the client would have to sell his personally-owned property to his limited company at the open market value, which although would incur all the usual costs, including the new stamp duty surcharge, in the long, the move made financial sense.

As the upfront costs will be considerable, the client had decided to sell the properties one at time. The first property to be transferred is a two-bed flat in a 17-storey block built in 2010.

The buy to let funding options available for trading companies is limited, so we needed to approach a specialist. Also, the flat’s position within a high rise building was potentially a problem and would likely hang on the valuer’s comments.

After weighing up the options, the client opted for a rate from one of the challenger banks to which we have semi-exclusive access on this type of finance. The lender’s valuer reported that the flat was a good risk because it was located in a large city with strong rental potential.

Alongside the application form, we helped the client put together the necessary paperwork which included the last two years’ trading accounts.

Here are the details of the deal which was processed without a hitch.

Property value: £265,000

Loan amount: £172,250

LTV: 65%

Rate: 5.40% (LIBOR + 4.65%)

Term: 10 years interest only

Borrower: Trading Ltd Co

Lender arrangement fee: 1.25% (£2,153)

Mortgage payment: £785 pcm

Rental income: £1,325 pcm

Gross yield: 6.0% pa

Consultant: Gavin Elley, 01625 416398

Consultant