The practicalities of a deeds of trust and using a Ltd company in England

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I am a higher rate tax payer and I want to expand my property portfolio further. I want to shelter the rental income from my income tax bracket as I wish to re-invest the money into buying more property. I do not need to draw money from the business. The practicalities of a deeds of trust and using a Ltd company in England

I have read extensively and considering my long term goals, using a Ltd company seems to be the best fit. However, in the current climate, lenders seem to have very low LTV products e.g. deposits required equal 35-45%, which is counter productive to growing a portfolio.

I have read that you can buy the properties as personal BTL mortgages with deposits of 25% and then create a deed of trust to the Ltd Company and benefit from corporate rates on income. However, it’s very hard to be sure this is in reality a workable option as I have many questions where the answers are not very forthcoming.

If anybody actually has any real life experience with this approach, I would really appreciate your help on these questions below:

  • Do you have to tell the mortgage company you are going to put the property into deed of trust to a Ltd company when applying for the mortgage?
  • Do mortgage companies accept this method to managing your portfolio?
  • If you do the deed of trust at the same time as you purchase the property, does this avoid any CGT issues since there would be no gain from when you personally bought the property (no change in Market Value price)
  • Does the deposit you put into the property become a ‘directors loan’ too?
  • How easy is it to re-mortgage the property when you need to re-finance the property?
  • Is there anything specifically that needs to be included in the deed of trust to ensure the income is regarded as that of the business?

Any other comments?

I really would like the advice of somebody who has actually done it or is doing it now as I don’t think everybody really understands the value of a limited company to some investors, especially when they are exposed to super high tax rates above the 40% bracket.

Many thanks

Terry

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Comments

  • Hi Terry

    You are facing the exact same dilemma I had whilst building my portfolio. I was also paying tax from other earnings at the highest rate at the time.

    I am not a tax adviser but I did look into this in depth and in hindsight I am convinced I did the right thing which was to focus on the outcome as opposed to focussing on the income.

    The outcome I wanted can be summarised as follows – in no particular order:-

    1) To produce substantial income for retirement in the most tax efficient manner possible
    2) To leave a legacy for my family
    3) A robust and low risk strategy which other landlords have used to survive highs and lows in property markets, interest rates and boom/bust economies for decades.

    I will share my own strategy and thought process. Before I do that I also want to give a few other people a mention.

    First, I had a very similar conversation with Mary Latham last week as she is in the process of writing her second book and is interested in publishing my strategy.

    Second, I received the following email from a gentleman to whom I shall refer to as Michael A ….

    “Hello Mark,

    You have a great website with a tremendous amount of information for landlords. I have a simple question regarding purchasing a buy to let with my wife. We are both in the top marginal income tax band and we are debating the following two options:

    1) buy the property as tenancy in common in our own names or
    2) buy via a UK limited company

    The appealing aspect of item 2) above will allow us to defer the distribution of any income the company generates as a dividend distribution today would be taxed at our marginal tax rate. Further, we have taken the view that any surplus cash could be used to add additional properties to the portfolio as a form of wealth accumulation avoiding the need to make a dividend distribution.

    We are interested in you thoughts and whether establishing a company would be sensible.

    We do have other properties in our own names so we have experience in the buy to let market.

    We look forward to receiving your thoughts.”

    The following words pretty much summaris the nub of my strategy – FOCUS ON THE OUTCOME – NOT THE INCOME

    There are several reasons I chose to avoid limited companies. The first of which is reduced appetite for lending and hence reduced competition from lenders. If you buy in your own name and put the properties into trust the ability to raise finance subsequently is reduced to less than a handful of lenders and may well be in breach of the original mortgage lenders terms.

    Other problems associated with owning buy to let property in limited companies and trusts

    1) Limited companies are immortal, therefore, tax on gains will always be payable at some point
    2) Getting the money out in a tax efficient manner. You will either need to take the money out on the form of dividend, salary or bonus, none of which are tax efficient.

    My entire financing strategy is documented here >>> http://www.property118.com/the-roots-of-my-property-investment-strategy/1744/

    There are 16 separate articles, all of which are linked. Part seven is particularly important. Please read it and feel free to come back here to ask questions or post them on the articles as you read through them.

    In summary:-

    1) Own properties half in your name, half in your wifes name.
    2) Borrow as much as possible and offset interest against rental income
    3) Retain 20% of the value of the debt in liquid assets
    4) Release equity by refinancing whenever possible
    5) When you get to the stage of borrowing more than the purchase price swap assets, i.e. wife buys yours, you buy hers. There is no CGT between spouses. New loans are for purchase of investment property, hence all interest can continue to be offset against rental income.
    6) Never sell – the CGT clock stops ticking when you are dead.

    Also read this article to understand my exit strategy >>> http://www.property118.com/exit-strategies-for-buytolet-landlords/
    .
    Mark Alexander recently posted…Estate agent commission for existing tenantsMy Profile


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  • Reply to the comment left by “Mark Alexander” at “27/08/2013 – 11:45″:

    Hi Mark, your response is useful to a degree and I am going to investigate further the re-finance issue and will of course read those recommended articles but there are other ways to take money from the business which is tax efficient, such as paying into a pension (which can be accessed from 55) or taking back money which was a directors loan (the deposits came from somewhere) and this is all tax free plus other legitimate expenses such as office space etc.

    Further, if I do decided to take some money out via bonus, dividends or salary, ultimately I am only pay severe tax on that portion of the income rather than 45% on all income. Finally, I am sure my current situation will not always be the case and there may be periods where I have no other income at all and can draw dividends at a lower tax rate which is very tax efficient.

    I am very much focused on my outcomes rather than income, hence why I am happy to consider a limited company to shelter revenue for re-investment into more property.

    I am unlikely to have kids and therefore once I am dead, I don’t really care if I pay CGT or some other punitive tax.

    Thank-you for your response and I hope other people post who have actually done this.

    All the best

    Terry


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  • Reply to the comment left by “Terry Whitehead” at “27/08/2013 – 13:13″:

    Hi Terry

    I do understand where you are coming from but I still think individual ownership with high gearing and strong liquidity to counter balance risk is the way to go.

    Whilst I was building my portfolio I accumulated substantial rental losses which I am now using in my retirement. However, the actual cash position continually improved due to building my portfolio in a rising market and consistently refinancing. It was the mortgage lender fees which created the retained losses and as these were added to mortgage advances they didn’t affect cashflow. What I didn’t factor into the equation was divorce at the height of the market in 2007 but hey ho, that’s all part of life I suppose.

    I’m now at a stage (and so is my ex-wife) where rental income is my only income and therefore, I will use the retained losses to live tax free for many years. Interest rates will go up and reduce my profits at some point but the plan is that that will only happen following a period of capital appreciation which will afford me an opportunity to refinance and raise extra liquidity again. Therefore, my strategy is based on taking advantage of tax legislation and the fact that history tends to repeat itself.

    Good luck with your own investigations, I fully understand why you would want to ask the questions and not rely on the first answer you get. I did exactly the same thing ;)
    .
    Mark Alexander recently posted…The GOOD Landlords CampaignMy Profile


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  • Terry

    I have to say the kind of advise you need goes beyond what should I do for property, you need ‘complete’ tax advise that will cover not only what you want to achieve with a property portfolio but also the wider issues concerning IHT and your current tax arrangements.

    I know it’s not an answer to your question, but as a qualified accountant I would not be allowed to give more of an answer by Institute rules that are there to protect you from being given wrong advise based on limited details.

    One of our Chartered Tax Advisers specialises in property clients and what we have seen from other accountants and also those who don’t take advise is shocking, believe it or not I am not trying to get you to contact us but please find an experienced and qualified tax adviser to give you a wealth checkup.

    Sorry to hijack the thread Mark but I felt it very important to bring this up.

    Jason


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  • Reply to the comment left by “Jason Holden” at “27/08/2013 – 15:28″:

    Thanks Jason, I think it is a very good point very well made.

    My own tax advisers would say exactly the same thing I’m sure.

    I see you are based North West from your profile.

    My accountants are in East Anglia – member profile here >>> http://www.property118.com/member/?id=452

    I offer this on the basis that Terry has a choice of at least two specialist advisers, who regularly contribute here, to chat further to if required.
    .
    Mark Alexander recently posted…The GOOD Landlords CampaignMy Profile


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  • Reply to the comment left by “Mark Alexander” at “27/08/2013 – 15:55“:

    Bit concerned that the professional advisers and property gurus do not realise companies do not pay CGT but corporation tax on chargeable gains.

     

     


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  • Reply to the comment left by “Peter Simpson” at “27/08/2013 – 16:55“:

    Which professional advisers and guru’s are you referring to Peter?


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  • Reply to the comment left by “Mark Alexander” at “27/08/2013 – 14:18“:

    Hi

    All very interesting and I agree always run it by the accountant or tax adviser

    I feel personal investment and using a Ltd company can both have advantages

    I did some private property dealings in the 70s but set up a limited company in 1980 and used it to buy property, renovate and sell and also buy property for letting.
    I agree one problem with borrowing as a limited company is you don’t have the choice or variety but once you got going they would lend money against the portfolio based on total value although only to 65 – 70%. If you added value to the properties and were in a rising market you could get additional finance as you went along.
    Following the recession in the late 80s I worked for other people as a higher rate tax payer and didn’t draw any money from the company for 15 years. It paid little corporation tax as the rental income and interest payments balanced out. At one stage HMRC actually gave the first £10 000 tax free for limited companies. If I had paid tax on the profits in the company it would have been at a rate about half the 40% tax if they were in my own name.
    As has been said if you take the money out as a salary then it becomes less attractive, particularly wen NI payments are included.
    At the same time you can invest in property in you own name or with your partner and make use of easier mortgages and higher L/V and also if you flip a combined CGT tax of £10 900 x 2 (figures from memory.) This is not available in a limited company.
    One advantage to me of the limited company is that I can distribute shares to my children, and so reduce my CGT/inheritance tax from my owned share value, but still have control of the portfolio.
    Also as the Ltd company is a separate legal entity when I die it can continue providing the bank are happy with the other shareholders – this isn’t the same for the mortgages are in my own name, as when I die the contract terminates – in short I find it has advantages for continuity.
    Over the years I have transferred some properties into the company and this is now loan capital which can be withdrawn without incurring tax.

    I enjoy property and money is not the overriding factor for me but do feel that both private and limited have their respective advantages.

    Regards

    Bob Grant


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  • You need an excellent accountant but as far as I know the answer to most of your questions is Yes. Particularly the first one: the lender will want the mortgage assigned to the legal title holder and your deed of trust will not cut the mustard between yourself and a limited company. You will also have to give a personal guarantee for the loan as well as the limited company so if the company should default you cannot just write off the loan.

    What Mark says about CGT is true but what he does not say is that IHT takes over when you die although there are ways of mitigating it.

    Your last 3 Qs are not really relevant but you would need a commercial loan and they are much more expensive than B2L at the moment plus need about 50% deposit based on a complex formula.

    At least that is my experience, if you find otherwise I should be interested to know.


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  • PS. You will still have to pay Corporation Tax.

    Also you say office space etc. – how big is your portfolio? Unless it is huge and you manage it yourself you will find it hard to justify more than a nominal amount to HMRC.


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