How to create a Directors Loan when Incorporating?
Hi, We will be Incorporating a single BTL property into a Ltd company – paying due SDLT and any applicable CGT.
We have about 50% equity in the property and would like for this to be treated as a Director’s Loan within the company.
My question is: In order to do this, do we need to take a loan or anything else, or could the company simply take a mortgage (as a purchase) for the remaining 50% which is currently mortgaged personally, and the equity be treated as a Director’s Loan?
Does there need to be a transaction for the Directors Loan, or would the transfer of asset be enough?
Many Thanks
Raj
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Member Since January 2011 - Comments: 12212 - Articles: 1408
10:16 AM, 21st January 2025, About 1 year ago
Hi Raj,
When incorporating your buy-to-let property into a limited company, and treating the equity as a Director’s Loan, here’s how you can structure it:
Treating Equity as a Director’s Loan:
The equity in the property (calculated as the market value minus the outstanding personal mortgage) can be treated as a Director’s Loan from you to the company. This does not require a separate cash transaction, as the transfer of value (equity) is sufficient, provided it’s correctly documented.
Funding the Purchase:
The company can secure a mortgage to pay off the existing personal mortgage and any additional cash you wish to take out of the deal. The remaining portion of the purchase price, representing the equity, forms the Director’s Loan. Ensure the property is sold to the company at its market value.
Documentation:
A Director’s Loan Agreement should be drawn up, outlining the loan amount, repayment terms, and any applicable interest. Proper documentation ensures compliance with company law and avoids future complications.
Mortgage Lender Considerations:
Not all mortgage lenders are willing to finance such arrangements. It’s crucial to work with a specialist mortgage broker who can identify lenders familiar with incorporation-related transactions.
Professional Support:
Engage an accountant experienced in property incorporations to handle the financial and tax aspects. You have already explained that you will pay CGT and you only have 60 days to account to HMRC for this. Additionally, a legal professional can assist with the transfer of ownership, preparing the necessary agreements and the SDLT payments for the company.
This approach ensures that your equity is properly recognised as a Director’s Loan within the company, with minimal disruption to your overall financing.
Member Since August 2023 - Comments: 4
8:50 PM, 21st January 2025, About 1 year ago
Many thanks, Mark.
We are already mid-way through the process, and it randomly occurred to me that I had assumed this, without getting qualified advice! It’s good to know we’re on the right track though!
Fortunately, no CGT to pay (London property, purchased in last 5-10 years), so no gain in value…. actually a small loss but we can’t claim a CGT loss either due to it being our own Ltd company!
Hopefully it should pay for itself in 5 years… Lets hope I don’t regret this!