Raising finance after incorporation with Beneficial Interest Co. Trust

by Readers Question

7 months ago

Raising finance after incorporation with Beneficial Interest Co. Trust

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Raising finance after incorporation with Beneficial Interest Co. Trust

After incorporating our property rental business we now wish to raise finance. The whole process was dealt with by Cotswold Barristers who were very helpful. For all mortgaged properties the beneficial interest was transferred to the newco.

However, there were a number of unencumbered properties within the portfolio and for these the legal titles were transferred into the Ltd Co. in their entirely, not just the beneficial interest, so the company is the registered owner at Land Registry. Since incorporation further properties have been purchased by the Ltd Co. in cash. As a result we have a situation where some properties are still registered at Land Registry in our personal names while others are registered in the name of the Ltd Co.

We now want to raise Ltd Company buy to let mortgages on the properties where the legal title is registered in the name of the Ltd Company, but all lenders will still want to carry out searches on us as directors. Those searches will show a number of properties held in our personal names. The lenders will also want to see personal bank statements which will obviously not show any rental income or mortgage payments for the properties because these pass through the Ltd Company account. The lender will want to see sufficient personal income for the directors to cover the buy to let mortgage interest payments and we cannot show this. Obviously we would intend to explain the whole BICT concept to them but I suspect most lenders simply won’t get it and a lot of time and application fees will be wasted.

If anybody has incorporated their property rental business using a BICT and subsequently raised mortgages your advice would be appreciated on how to explain to a lender the disparity between the number of properties registered in your personal name(s) and the lack of rental income and mortgage payments on your personal bank statements.

Many thanks

Kate



Comments

Neil Patterson

7 months ago

Hi Kate,

The properties will be financed in the name of the limited company with you as director/s and you will use the company accounts which will show rental income profit etc.

I will see if Malcolm at Brooklands commercial finance can make a comment for you as well.

Mark is off work today, but has said "The explanation to the lenders is a very simple one, ie we are the legal owner of some of the company assets as nominees. The properties are accounted for on the company P&L and balance sheets."

Not surprisingly, this is a FAQ from clients interested in BICT. Our standard response is ...

"What about when the time comes to refinance?

Your company will already own 100% of the beneficial interests in your properties. It will need to call for the legal title to be transferred to the company before you can refinance. There will be no additional CGT or SDLT payable on the transfers. This is because these matters would have been accounted for when the beneficial interests of the partnership were transferred to the company.

New refinancing applications will be in the name of the company. It is highly likely that mortgage lenders will still underwrite their risks as if they are lending to you personally, hence you will need to retain an unblemished personal credit status as well as for the company. Mortgage lenders are also likely to ask you to personally guarantee their exposure to risk.

Due to changes in tax legislation and underwriting rules set by the PRA, more lenders are offering mortgage products to limited Companies than ever before. Their underwriting criteria is more relaxed than is for individual borrowers as they are not required to consider the implications of finance cost relief being restricted for companies. Such is the competition for new limited company mortgage lending these days that most lenders providing mortgages to companies do so at the same rates of interest rates as those offered to individual borrowers. There is speculation that Limited Company mortgage rates might even become more competitive than for individual borrowers.

What about when you want to sell a property?

The company will need to invoke its powers as a beneficiary of the trust to enable the sale. This will happen simultaneously at exchange of contracts. 100% of the net sale proceeds will become the property of the company once the conveyancing solicitor dealing with the sale has settled any mortgages secured against the property and after deducting any costs of sale such as legal and estate agency fees.

Companies do not pay CGT on capital appreciation. Instead they pay corporation tax which is 20% in the 2016/17 tax year and will fall to 19% in the 2017/18 tax year, then to 18% in the 2018/19 tax year and then 17% in the 2019/20 tax year.

Note that companies do not have annual CGT exemption allowances. Instead, they have indexation allowances. In other words, if your property grows at the rate of inflation (or less) there will be no corporation tax to pay on sale, regardless of the sale price.

The base cost for calculating appreciation in value is the value at which property is transferred to the company. For example; let’s say you personally acquired a property for £100,000 and that by the time you had transferred the property to the company it was worth £200,000. The £100,000 of capital gain you had made will have been ‘washed out’ at the point of incorporation by rolling the gain into the value of new shares created in the company and claiming incorporation relief on the creation of the new shares. If the company were to subsequently sell the property for £300,000 it would only pay corporation tax on the additional £100,000 of gain in value, less any indexation allowances.

All net proceeds from rental profits and sale of assets belong to the company. It is for the Directors of the company to decide how much of the retained profits are distributed to shareholders in the form of dividends.

The company could, theoretically, sell all properties and pay dividends to shareholders until there is no retained profit remaining".

PS
I should add that all BICT clients can ask us to liaise with lenders and brokers prior to embarking on any refinancing exercise. There is no additional fee for this, as it is part of the "after-sales service".

Gerry Murphy

7 months ago

Reply to the comment left by Neil Patterson at 25/01/2018 - 11:09
Thank you for you reply which is very helpful.

Ramus Wood

7 months ago

Whilst ltd co rates have been coming down, there is not one single lender who charges the same interest rate for ltd co BTL lending as for personal BTL lending for comparable (LTV and fixed / tracker duration) products.

It would be good to hear from clients who have actually done this, because as far as I know every single UK lender have stated they will not accept BICT arrangements.

Mark Alexander

7 months ago

Reply to the comment left by Ramus Wood at 26/01/2018 - 14:13
Your comments make no sense whatsoever.

BICT has nothing to do with mortgage lenders. Whether they understand it, approve of it or consent to its use is irrelevant unless their T&C's specifically prohibit the transfer of beneficial interest in property.

There are several lenders which charge the same or less for Limited Company lending as they do for individual lending.

Finally, there are also several lenders that will lend more to companies than they will to individuals against the same property. This is quite a recent thing bought about as a result in the latest PRA lending rules imposed on mortgage lenders, who now have to consider the tax position of their borrowers as well as other factors when underwriting mortgage applications.

Mark Alexander

7 months ago

Reply to the comment left by Ramus Wood at 26/01/2018 - 14:13
PS - does Deutsche Bank have conditions in its mortgage contracts which specifically prohibit individual borrowers from transferring beneficial interest?

Second question; have your employers ever obtained possession entirely on the grounds of beneficial interests having been transferred?

Third question; can you cite a single case whereby a mortgage lender has obtained possession entirely on the grounds of beneficial interests having been transferred?


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