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Retained profits in Ltd company


andy_a

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Hi guys, I am new to the forum and looking forward to getting involved. I’m looking into options for purchasing my first buy to let property and wanted to reach out to see if anybody had experience of using retained profits from a limited company as a mortgage deposit. My company is in the events industry and I have approximately £50,000 to invest. I am also employed with a gross annual salary of £34,000. I’m looking into the following options to determine which would be the most tax/cost efficient:

1)      Look to purchase through my existing Ltd company? I would need to add a new SIC code to the company, however I have been told most mortgage providers will not lend to Ltd companies with dual SIC codes?

2)      Set up a new Ltd company and loan £50,000 from the existing company through a loan agreement

3)      Pay the additional income tax to extract the £50,000 and purchase the property personally

In terms of strategy, long term capital growth is my priority over rental yield. My goal is to invest in further properties down the line and build a portfolio.  

I appreciate I’ll need to speak with an accountant and mortgage brokers but was wondering if anybody has experience of a similar situation, what they did and why? Many thanks, Andy

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Hi Andy, I'm in exactly the same position, I have a tech business and I'm looking to start investing in properties through a LTD company.

I contacted my mortgage broker and received the following information:

  • Most lenders do not allow the use of a Trading company, they require a new company to be used known as a ‘Special Purpose Vehicle’ for the sole use of property investment
  • The company can be set up at day one, and will need to be set up under the relevant ‘SIC’ Code (Standard Industry Classification).  
  • Not every SIC code for property is accepted by every lender
    • At point of application the company will need to be setup and require an SIC code. I would speak to your accountant about this, however the 3 most popular that lenders accept are;
      • (a) Buying and selling of own real estate - 68100
      • (b) Other letting and operating of own or leased real estate - 68209
      • (c) Management of real estate on a fee or contract basis – 68320

 Another very interesting point which I'm now checking with my accountant is the following:

  • You can transfer funds from an existing business for the deposit funds, but lenders will generally only accept this if the directors on the trading company are the same as the directors of the SPV. This saves having to draw deposit funds out as a dividend. (Your accountant can advise you on this).

I'm still not clear if / how it works, but it sounds like the best approach in this scenario.

Otherwise, you can gift the deposit to the company and later draw what you're owed.

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It’s often better to separate investment and trading activity. I have a number of clients with companies that have interest free loans from trading companies for deposits. The loans are ultimately treated as shareholder loans. Where the shareholders for both companies aren’t the same, the lender will view another shareholder from a lending company as a participator and perceive a risk to be present. Sounds like you’ll be okay avoiding the double tax charge by having to extract funds as income first. Good luck!

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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On 8/27/2020 at 12:51 PM, peretz said:

Thanks for your responses guys, it sounds like a loan from company A to company B (SPV) is the way to do it. I've noticed interest rates are higher on Ltd company buy to let mortgages but I think I'm correct in saying these are tax deductible. Time to start a spreadsheet and do some number crunching I think!

 

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