Flats instead of money back

by Readers Question

8:47 AM, 22nd February 2018
About 10 months ago

Flats instead of money back

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Flats instead of money back

Can anyone get there head around this for me. An investor wants 3 flats building (Value is £465k) by “giving” me or my company £450k to do a commercial conversion to 6 flats. I keep the other 3.

Worst case scenario, the company needs another £350K to do the work and cover all loan fees to make all 6 flats.

Normally my company uses investor funds as deposit to borrow the remainder from the banks. I fancy this investor will want a good deal of security, who wouldn’t, so a first charge. But then my limited company won’t be able to borrow from the banks! That’s the first hurdle. (Although there probably is a lender somewhere out there, or I might be just about able to find the “cash”).

The second hurdle is keeping the other 3 flats and still getting the money out. Commercial lending is around 60% and repayment, so not ideal on a £465k valuation. Selling them to me is not good for personal tax reasons!

The third hurdle is the SDLT. The investor wont be happy to pay any! – I feel there is a way to reduce this liability but cannot see how.

Normally my company sell the freehold for a nice figure once a few flats have sold, but again I think that could go if it helped reduce the SDLT.

In summary, the goal is use the £450k to borrow £350k development funds. Build 6 flats from a Commercial unit. Give investor 3 instead of money back and no SDLT!, then keep 3 for me or my company. Oh and of course, I have factored in making a healthy profit.

Many thanks

Allan



Comments

Neil Patterson

9:49 AM, 22nd February 2018
About 10 months ago

Hi Allan,

Mezzanine finance may help on the money side, but I am a bit confused as to why the investors thinks there may be no SDLT?

ilc72

16:16 PM, 22nd February 2018
About 10 months ago

Reply to the comment left by Neil Patterson at 22/02/2018 - 09:49
I suspect that by buying six units they are hoping to avoid SDLT if purchased in one transaction.

Non-residential Property rates

The SDLT regime for non-residential and mixed use property changed to a banding system on 17 March 2016.

Non-residential property includes:

Commercial property such as shops or offices
Agricultural land
Forests
Any other land or property which is not used as a dwelling
Six or more residential properties bought in a single transaction
A mixed use property is one that incorporates both residential and non-residential elements.
The new rates are as follows:

Band: market price £

Non-residential
0-150,000 0%
150,001 - 250,000 2%
Over 250,000 5%

I’m guessing he feels that it would be beneficial for SDLT to use this method rather than the conventional tables that three flats would take.

Allan Wadsworth

17:14 PM, 22nd February 2018
About 10 months ago

Reply to the comment left by Ian Clifford at 22/02/2018 - 16:16
Spot on Ian,
Its currently an unused office so basic SDLT on the £450k purchase price. IF the company create the 6 flats and use the 3 flats (£465k)to clear his debt would that be SDLT free? The other 3 flats are retained in the company (or could be sold) so who pays what tax on those three....
I must sound thick but its really bugging me not being able to see how everyone can gain from this interest free loan of £450k
Cheers Allan


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