Trust Deed in favour of Limited Company for trading

by Readers Question

18:38 PM, 8th March 2015
About 4 years ago

Trust Deed in favour of Limited Company for trading

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Trust Deed in favour of Limited Company for trading

I have read many articles on advantages of owning buy-to-let property & related mortgage(s) in personal names, and having a Trust Deed in favour of a limited company to divert rental profits to the Company (20% tax). Trust Deed in favour of Limited Company for trading

I am in the 40% tax bracket with my salary, and my wife is well within the 20% tax bracket.
We have one property – presently owned 90% by my wife and 10% by myself – rental profits are therefore divided 90/10.

We are wanting to purchase a few more buy-to-let properties – to keep long term for income and ultimately to boost pension income. All will be mortgaged.

Should we consider:

  1. buying in a limited company and mortgaging in the limited company. If so, is it difficult to obtain mortgages – and will we pay a premium interest rate compared to personal mortgages?
  2. buying in our own names and having mortgagers equally, and then enter into a Trust Deed with a limited company to divert rental profits to the company. If so, could we not draw dividends, and use all profits to merely reduce mortgages to zero for our retirement? . Obviously we would draw dividends when we retire, and then only pay 20% tax. Would the Trust Deeds need to be included on the Land Registry Title Deeds by the solicitor when the properties are registered in our names, or can this be done afterwards? Would any tax advisers/accountants be able to complete the annual property tax returns easily on this basis?
  3. continue to buy the extra properties on the present basis (90% – 10%) and not bother with the limited company and Trust Deeds? If so, would there be a potential problem with HMRC in any way for the split 90/10?

I am sure that there are many other individuals who have similar questions or have been in a similar position and possibly solved these matters, and I look forward to reading responses.

Many thanks

Bruce



Comments

Mark Alexander

18:50 PM, 8th March 2015
About 4 years ago

Hi Bruce

Very interesting question, thanks for posting it and I too look forward to reading the answers. However, internet forums should be used for ideas and guidance only and should not be relied upon for professional advice. You should always consult a qualified tax adviser who is insured to provide the necessary advice bespoke to your individual circumstances.

Having got that out of the way, here's my personal thoughts:-

a) buying in a limited company will reduce your financing options and may well result in you paying a premium for finance.
b) limited companies do not get annual CGT exemption allowances
c) the most effective way to split ownership that I've come across to date is a declaration of trust. They are inexpensive to establish, they are very flexible and they will not affect your ability to borrow.
d) owning in joint names and granting a beneficial interest to a limited company seems very complex.

There are also several other discussions on Property118 regarding ownership as individuals/partnerships/companies via this link >> http://goo.gl/XCgNlf

This is a link to the member profile of my personal tax adviser who I recommend highly >>> http://www.property118.com/member/?id=452

I also recommend that you take a look at this website >>> http://buytoletconveyancing.co.uk/
.

Chananel Damen

14:03 PM, 9th March 2015
About 4 years ago

c) the most effective way to split ownership that I’ve come across to date is a declaration of trust. They are inexpensive to establish, they are very flexible and they will not affect your ability to borrow.

hi mark,
if i understand, you would declare the trust to the lender.
which bank would lend buy to let on this scenario?
thank you

Mark Alexander

14:55 PM, 9th March 2015
About 4 years ago

Reply to the comment left by "c dam" at "09/03/2015 - 14:03":

The basis upon which beneficial interest in a property is split is of no business to a mortgage lender and need not be declared as it has no effect on the security held by the lender whatsoever.
.

Chananel Damen

15:00 PM, 9th March 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "09/03/2015 - 14:55":

you might be right, but my solicitor is telling me if lender is aware of property being held in trust, they would not lend.

Mike W

16:30 PM, 9th March 2015
About 4 years ago

Hi Bruce,
Like Mark has said you need professional advice.
However I think I have spotted the problem.
A trust to divert 'ownership' and therefore attribute income between husband and wife has no capital gains implications. But to divert ownership to a company which is a third party would trigger a 'deemed sale' and therefore trigger CGT. Just as a direct sale to the company would trigger CGT.

As to schemes in general just remember the law is frequently changing. If schemes are effective in one year the law can easily be changed the next. The government needs money to fill the black hole - it is borrowing money every day in order to carry on spending more than it earns! Can an individual do that?

I remember when Gordon Brown brought in tax free allowances for small companies, my tax adviser said don't fall for that trick. The allowance will disappear and you will have set up a company which may not be tax and borrowing efficient and you may have the high cost of closing it down.

Of course I am not an expert .......

Mark Alexander

18:03 PM, 9th March 2015
About 4 years ago

Reply to the comment left by "Mike W" at "09/03/2015 - 16:30":

Hi Mike

I don't think CGT will be an issue in this instance on the basis that Bruce is looking to apply the structure to new purchases, hence zero gain at the point of transfer.
.

Jerry Jones

20:39 PM, 9th March 2015
About 4 years ago

Talking of trusts, I did read somewhere that it is possible for the equity part of a mortgaged prop to be put into a trust. How? and why?, are my initial questions.

David Mensah

15:19 PM, 15th March 2015
About 4 years ago

you're splitting both ownership and rental 90/10 --

I think that with a DoT the rental split doesn't need to be the same as the ownership split, see .e.g. this discussion
http://www.markmclaughlin.co.uk/index.php/archives/1554
"Adam owns 100% of a buy-to-let property worth £250,000. He decides to give a 50% interest in the property to his daughter Bridget. However, it is agreed that Adam will receive all the rental income from the property."

the context is slightly different than yours (it's about saving IHT in future), and Adam will need to pay CGT on the gift his daughter, but the principle: ownership share is not the same as rental share, holds.

as a married couple you need to file a form 17 to HMRC, but you probably do that already

David Mensah

15:20 PM, 15th March 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "09/03/2015 - 14:55":

Hi Mark,

I'm interested in this comment -- why would a lender's security not be affected by a DoT that splits ownership?

Mark Alexander

16:38 PM, 15th March 2015
About 4 years ago

Reply to the comment left by "David Mensah" at "15/03/2015 - 15:20":

Because the lender still has first charge and the borrowers liabilities remain unchanged.
.

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