Jeni Browne discusses the pros and cons of the two primary borrowing options for business owners who are looking to invest their company’s cash in buy to let property.
We are seeing a large upturn in enquiries from clients who have their own limited company through which they run their day-to-day business, who have saved up some cash and now want to invest in property.
These people are keen to retain the cash within the business because to withdraw it may well mean taking it as a dividend and thus having to pay income tax. This means using the business through which to invest and there are currently two main options when looking at qualifying for a buy to let mortgage.
OPTION 1: Buy to let borrowing directly through a trading company. At the moment there are approximately nine lenders which can lend to a trading company (rather than a SPV), although most of these lenders will take personal guarantees and crucially, a fixed and floating charge debenture over the company to which they are lending.
As you can imagine, lots of our clients are not keen to hand this level of authority over, so if this applies to you, remember to ask us about the lenders which do not require a debenture and only take the property as security supported by a personal guarantee from the directors, eg. Keystone.
OPTION 2: Buy to let borrowing through a SPV via director’s loan. OK, this is where it gets interesting - and a bit more complicated. The good thing is that many more lenders accept SPVs than trading limited companies but you have to get the cash into the SPV first without paying it to yourself and thus incurring tax. Historically this has been done via an inter-company loan:
- Where the SPV is wholly owned by the trading company
Unfortunately, this route is not acceptable to most lenders because they prefer to lend to companies that are owned by individual shareholders not by another company. (It’s a shame lenders don’t like this route because tax wouldn’t be incurred!)
- Where the SPV is owned by one or more of the shareholders in the trading company
Unfortunately, it seems that tax advisers are steering their clients away from this option amid concerns that HMRC may take the view that the loan to the SPV is in fact a disguised loan to the shareholders, which HMRC will then seek to tax as a dividend.
So what, if any, is the alternative?
We are now seeing more instances where our clients are being advised to adopt a hybrid structure whereby both the individuals and the trading limited company itself own some of the SPV shares, (i.e. the trading company invests in the SPV which is a bona fide thing for it to do).
Specifically, the trading company buys a special class of shares with restricted rights to:
- Capital gains
- Operational say over the running of the SPV
Now this does sound great BUT as always, we then need to consider impacts buy to let mortgage eligibility.
As lenders generally like to lend to companies with a flat structure of ownership by individuals, these people usually have to offer a personal guarantee. I say usually because some lenders do not require PGs from anyone with a shareholding of less than 20%.
So, we did some research to see which lenders would consider a structure where a shareholder is a trading company. The general outcome was that lenders will do this with only a couple of lenders giving an outright no. Of those in the 'yes’ camp:
- Most needed the directors and shareholders to be the same across BOTH companies
- A couple of lenders simply said yes
- One lender said yes, as long as the trading company owns less than 20% shares in the SPV
So as you can see, it’s complicated but doable. Perhaps more importantly, it’s definitely worth speaking to a tax adviser before you do anything...... oh, and you will probably need a specialist mortgage broker to boot!
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