'Transferring' mortgage-free property to SPV

[Moneytalks]

Hi,
I have a mortgage-free rental property, gross rental yield approx 6%.
I am a higher rate tax payer and the house is owned personally.
I plan to add significantly to my investment portfolio with long term aim of getting to 10+ properties and thus reduce my employed work.
I have begun considering setting up a SPV for this future property business but I have a few questions which I am struggling to find an answer to.

If I 'transfer' current property to new SPV, I am aware there will be SDLT costs of approx 4-5k but this sale will trigger a SDLT refund to approx 9k from recent purchase of new primary residence. Capital gains will be covered by annual allowance.

So my questions are:
1) As the property is mortgage-free, will the 'transfer'/sale & purchase by SPV be considered as a Director's Loan to the current market value of the property?
2) If yes, am I correct in saying that I could potentially withdraw the amount of that Directors loan tax-free from the SPV Inthe future as funds allow? Or how does it work?
3) If the SPV was to purchase the property through a new mortgage at say 75% LTV - would that 75% then go to me personally (like a equity release situation) and the 25% 'deposit' be considered a Director's Loan (as above)?? Or am I getting this completely wrong?

My reasons for considering the SPV route if more for the future investment properties in terms of Corporation tax and mortgage interest relief.

Any constructive feedback or suggestions would be greatly appreciated.
Thanks.

[jpkeates]

1 - It depends how you account for it. You don't want it to be a gift! And don't forget your potential CGT. Things don't happen by default or automatically, they happen because the company decides to do things a certain way and then accounts for what and how they did them.
Being a private landlord it's a personal business, so there's no split between you and your company - when you're trading as a company, the company is a separate "person" who's activity has to be documented.
2 - Yes. It's the repayment of a loan, which isn't income. You might want to look at your company also making pension contributions, because that might be even more tax
3 - Yes, provided that's how you account for it that way.

You need to think about the structure of your company.
A mortgage lender is going to want a single SPV per property with personal guarantees up to a point of portfolio growth.
It might be sensible to see if you can find an accountant who has done this kind of thing before.

[Gordon999]

1. A newly incorporated " property company" with no capital , can "purchase" your mortgage-free house with 100% loan from the director. A SPV is a special purpose company for "property investment" and it may be committed under mortgage loan agreement to one lender. The director is liable for cgt after the sale of house to company..

2. The company pays tax at 19% on annual profit and the balance ( free cash) can be paid to director to reduce the loan.

3. Yes. The company purchases your house , financed by 25 % deposit ( director's loan) and 75% from mortgage lender.

[Moneytalks]

Thank you both very much for your replies, much appreciated.
I certainly plan to engage an accountant prior to committing to the SPV route but was just wanting to clarify a few things first to make sure I wasn't completely on the wrong track.
As the property was my former residence for the majority of the time since owning it, any capital gains should be covered by my annual allowance so I should be ok from that point.

I will look in to the pension contributions as means of repaying the Directors Loan.

Can I ask, purely out of interest, if it was you what do you see as the best way of releasing the equity from the current property? I think I am leaning towards option 3 above.

"A mortgage lender is going to want a single SPV per property with personal guarantees up to a point of portfolio growth." - sorry I can't seem to quote this properly.

Ok so are you saying, I may need to set up individual SPVs for each new future property purchase? But I'm not sure how you could ever build up a portfolio in an SPV if you just have one property per SPV? Or is that they would require personal guarantees up until a certain level of properties in the one SPV?
I just wonder if you had to have separate SPVs per property, then that would likely significantly increase your admin work in terms of accounts/accountancy fees etc?

Apologies for the probably very basic questions!

Thanks again for your help so far!

[jpkeates]

Ok so are you saying, I may need to set up individual SPVs for each new future property purchase? But I'm not sure how you could ever build up a portfolio in an SPV if you just have one property per SPV? Or is that they would require personal guarantees up until a certain level of properties in the one SPV?
I just wonder if you had to have separate SPVs per property, then that would likely significantly increase your admin work in terms of accounts/accountancy fees etc?

There comes a point when a portfolio lender would start to look at your business differently than the people you're going to be borrowing from as you start out.

But until then, the single purpose relates to the single property it will own,

What the lenders are seeking to mitigate are the options available to a limited company that are not available to a private individual.
So they will want personal guarantees from the owner(s) of the limited company to offset the risk that the business might simply be shut down or go out of business leaving them with no mortgagee.
As a result, the guarantees and the associated company need to be kept discrete from other guarantees and other borrowing. If the business fails, the lenders don't want to be competing with other lenders for the same limited assets and guarantors.

Most lenders have a policy of limiting their lending to one company or one person.

Many people don't have the assets or wealth to offer the kind of guarantees that are needed for the growth they aspire to.

Try and find a good broker who understands what you're trying to do.

[Moneytalks]

There comes a point when a portfolio lender would start to look at your business differently than the people you're going to be borrowing from as you start out.

But until then, the single purpose relates to the single property it will own,

What the lenders are seeking to mitigate are the options available to a limited company that are not available to a private individual.
So they will want personal guarantees from the owner(s) of the limited company to offset the risk that the business might simply be shut down or go out of business leaving them with no mortgagee.
As a result, the guarantees and the associated company need to be kept discrete from other guarantees and other borrowing. If the business fails, the lenders don't want to be competing with other lenders for the same limited assets and guarantors.

Most lenders have a policy of limiting their lending to one company or one person.

Many people don't have the assets or wealth to offer the kind of guarantees that are needed for the growth they aspire to.

Try and find a good broker who understands what you're trying to do.

Thank you, that makes a lot of sense. I get what you mean in terms of lenders not wanting to compete with other lenders if any defaults etc. I had just (wrongly) assumed that each mortgage would be linked to each property but I see what you mean now.
I would have no issues in terms of providing personal guarantees.
Would it then make more sense to try and get the SPV to take out say the 75% LTV mortgage on my current mortgage-free property which would then release those funds to me which could act as deposit for next property in separate SPV?
Or in the case of 100% director loan and no mortgage on the existing property when "purchased" by the SPV, would a lender look more favourably on that when trying to add another property?

Hope that makes sense!

[loanarranger]

I can confirm that the vast majority of lenders will allow one Ltd Company to be have mortgage borrowings with several lenders , I recall Paragon did in fact require a company to have loans with them as a single entity but after a period of time relaxed this requirement but it is prudent to ask a broker what the policy is for main stream lenders in the corporate lending sector.
Single Purpose Vehicle is reflected in its title and the SPV codes which differentiates it from the activities of a Trading Company.
Another key feature is that the lender normally takes a single charge on each property and personal guarantee of any director and sometimes a shareholder whose shares are of a significant level, they are not cross collateralised, I say normally as I know of certain commercial banks who do cross collateralise across all assets held by the company; again your broker will advise.

[jpkeates]

I can confirm that the vast majority of lenders will allow one Ltd Company to be have mortgage borrowings with several lenders

It's not a recent experience, but I found that to be true when there was a portfolio, but not when I wanted to start from zero and build one.

Which makes perfect sense, but it doesn't help the OP.

You know this market way better than me, though.

[Moneytalks]

Another key feature is that the lender normally takes a single charge on each property and personal guarantee of any director.

Very interesting point, thank you for your great insight, much appreciated.

In the scenario of a SPV with one director providing personal guarantees on each mortgage with the lender taking the single charge on each property - is it really significantly different from holding BTL properties in your own personal name (not SPV) from the lenders' perspective?

[loanarranger]

Lenders operating in this sector tend to use a more generous rental calculation compared to an individual who is a Higher Tax Payer, there is a misconception that there is a significant interest rate differential by borrowing through a Limited Co, this I can assure is not the case, the only negative is that on each occasion you need to have independent legal advice as a director , even though this can be given by another solicitor within the practice the fees are duly increased.

[L4NDLORD]

Sometimes a private property company will find that a specialist lender better understands what it is they want to do. The clearing banks are probably not the best option. I once asked my (commercial clearing) bank manager for a £500,000 mortgage; his reply was that it would really be much better if you were to borrow a million! I said yes I could do that but would want to pay back £500,000 immediately. And on and on the conversation went, including the Bank really wanting a Debenture, which is a floating charge over all of the Company's assets which I said was out of the question. The best thing to do with Bank debt is to pay it off as quickly as you can and be shot of Bankers. It takes a while to build up equity from rents and property trading but it can be done and contrary to everything they teach at Buisness Schools I would much rather be a smaller landlord with little or no debt than a landlord with a bigger portfolio and bigger debts. Leverage works both ways. In a falling market you can lose the lot. I've seen it happen to bright guys in '73, '91 and '08.

[Claymore]

1. A newly incorporated " property company" with no capital , can "purchase" your mortgage-free house with 100% loan from the director. A SPV is a special purpose company for "property investment" and it may be committed under mortgage loan agreement to one lender. The director is liable for cgt after the sale of house to company..

2. The company pays tax at 19% on annual profit and the balance ( free cash) can be paid to director to reduce the loan.

3. Yes. The company purchases your house , financed by 25 % deposit ( director's loan) and 75% from mortgage lender.

Gordon, can company profits be reduced by making some pension contributions?

[jpkeates]

Gordon, can company profits be reduced by making some pension contributions?

Not Gordon, but yes.

[Gordon999]

You can find information on limited company contribution to pension for director online :

https://www.unbiased.co.uk/life/smal...pany-explained

[Anna1985]

Moneytalks , just wonder why would it trigger the SDLT rebate? You moved your main residence didn't you?