Financing property purchase
Discussion
I'm looking to purchase a local property as a refurbishment project. The goal would be to resell at profit rather than to let it out (rental income would not be the 120% (or whatever is required) of mortgage.
I would prefer to be able to purchase the property as a commercial venture rather than as a personal one. I would be looking to do further properties in the future
The options for purchasing, as I see it, are:
1) My ltd company buys it
2) I set up a new company and buy through that
Benefits of 1) are that the company is already established has some trading history and some cash to use as deposit etc. Downside is that the company is FRS registered for VAT and is in a different line of business. The other aspect is that I would prefer to run them as separate companies
Benefits of 2) are that it would be a distinct property business and therefore not confused with the IT business. Downside is that raising finance as a brand new company might be a problem
Can anyone shed light on these or other options and make any recommendations. What sort of financing would be open to the companies and what sort of % rates? Finance would be required for approx £300k.
I would prefer to be able to purchase the property as a commercial venture rather than as a personal one. I would be looking to do further properties in the future
The options for purchasing, as I see it, are:
1) My ltd company buys it
2) I set up a new company and buy through that
Benefits of 1) are that the company is already established has some trading history and some cash to use as deposit etc. Downside is that the company is FRS registered for VAT and is in a different line of business. The other aspect is that I would prefer to run them as separate companies
Benefits of 2) are that it would be a distinct property business and therefore not confused with the IT business. Downside is that raising finance as a brand new company might be a problem
Can anyone shed light on these or other options and make any recommendations. What sort of financing would be open to the companies and what sort of % rates? Finance would be required for approx £300k.
As a rule most banks will lend 70% of the purchase price, drip feed 70% of the renovation costs and in some cases advance you 70% of the final value.
They will require 1st charge over the property and usually additional charges over another property ie your home. Interest varies but look for 1.5 - 2% above base.
They will require 1st charge over the property and usually additional charges over another property ie your home. Interest varies but look for 1.5 - 2% above base.
The company currently carries on a a non-property related trade (I assume).
If it starts "trading" as a property developer as well, it will now have two trading activities rather than one. This will need to be reflected in the accounts of the company and separate profits calculated for both activity. The Corporation Tax position of the company will also be more complicated - especially if one activity results in a trading loss and the other results in a trading profit.
The Memorandum and Articles of the company will need to be checked to ensure that this type of activity is allowed.
Property transactions are normally exempted from VAT and, even if the company is VAT registered regarding its existing business, it will not necessarilly have to charge VAT on its property related income. Obviously, in these circumastances, it cannot claim back VAT on property related costs either. This could have an implication for claiming back VAT on its normal business because it will now have VAT Exempt Income which can restrict VAT claims on your costs.
If and when the company makes a profit on its property sale, it will pay Corporation Tax on those profits. If and when the shareholders/directors extract their personal income from the company, they will pay Income Tax on that income - although this can be mitigated with some judicious tax planning.
If it starts "trading" as a property developer as well, it will now have two trading activities rather than one. This will need to be reflected in the accounts of the company and separate profits calculated for both activity. The Corporation Tax position of the company will also be more complicated - especially if one activity results in a trading loss and the other results in a trading profit.
The Memorandum and Articles of the company will need to be checked to ensure that this type of activity is allowed.
Property transactions are normally exempted from VAT and, even if the company is VAT registered regarding its existing business, it will not necessarilly have to charge VAT on its property related income. Obviously, in these circumastances, it cannot claim back VAT on property related costs either. This could have an implication for claiming back VAT on its normal business because it will now have VAT Exempt Income which can restrict VAT claims on your costs.
If and when the company makes a profit on its property sale, it will pay Corporation Tax on those profits. If and when the shareholders/directors extract their personal income from the company, they will pay Income Tax on that income - although this can be mitigated with some judicious tax planning.
The easiest way to do it using a newly formed Ltd company would be to get ‘bridge finance’ for 70% of the current value of the property (this finance will be secured against the property). You will be able to get this easy enough through a new company with no trading history or proven income.
This means you will need to have cash available for 30% of the cost of the building and 100% of the redevelopment costs + fees (normally in the region of 2 – 4k).
Hope this helps.
This means you will need to have cash available for 30% of the cost of the building and 100% of the redevelopment costs + fees (normally in the region of 2 – 4k).
Hope this helps.
We are currently buying a building for our business to operate from, a fairly standard brick built industrial unit for £250k. My preference was to set up a separate company to own the building then rent it back to the trading company. The reasoning beings that if the trading company goes tits up (not likely but who knows what may happen), then a major asset would be safe. The advice from our accountant was to buy through the trading company, something to do with corporation tax allowance being split between profitable and non-profit making companies. The intention is to transfer the building into a SIP at some time in the future, even if that will mean paying stamp duty twice.
Companies whoch derive their income from the rental of property are unable to avail of the special low rates of Corporation Tax which are available to "Small Trading Companies". They also have to disclose quite a bit more in their annual accounts AND perform annual valuations of their properties.
They will be subjct to Capital Gains Tax at their Corporation Tax rate when the property is sold and companies do not obtain the Capital Gains Allowance (£8.800 for 2006/07) available to individuals.
They will be subjct to Capital Gains Tax at their Corporation Tax rate when the property is sold and companies do not obtain the Capital Gains Allowance (£8.800 for 2006/07) available to individuals.
Thanks for the comments so far...
Can you suggest any specific lenders?
This means you will need to have cash available for 30% of the cost of the building and 100% of the redevelopment costs + fees (normally in the region of 2 – 4k).
If it's a new company, I assume the cash would either have to be a loan by a director of the Company or (if possible) a loan by another company (at commercial interest rates?)
Peter, is this something you've done?
peterh2 said:
‘bridge finance’ for 70% of the current value of the property (this finance will be secured against the property).
Can you suggest any specific lenders?
peterh2 said:
This means you will need to have cash available for 30% of the cost of the building and 100% of the redevelopment costs + fees (normally in the region of 2 – 4k).
If it's a new company, I assume the cash would either have to be a loan by a director of the Company or (if possible) a loan by another company (at commercial interest rates?)
Peter, is this something you've done?
Have a quick on google.co.uk for ‘bridging finance’. You will get a lot of matches. Basically a ‘bridging loan’ is a short term loan (typically 1 day – 6 months) which will have a high interest rate and normally must be secured against something e.g. a property.
Yes you will also need a loan for 30% of the cost of the property + 100% of the development costs + general fees from one of the company directors. I’m doubtful you will be able to get a loan by another company for this.
When you have redeveloped the property you will need to get a buy-2-let mortgage which again should be easy enough to get through a newly formed Ltd company with no trading history as long as the expected rental income is >125% of the interest only part of the mortgage payments. You will then use this mortgage to pay off the bridging loan and the loan you have received from one of the company directors. Hopefully you will have a bit left over which you can pocket as well. You will also be left with 15% of the value of the property in equity.
Hope this helps.
Yes you will also need a loan for 30% of the cost of the property + 100% of the development costs + general fees from one of the company directors. I’m doubtful you will be able to get a loan by another company for this.
When you have redeveloped the property you will need to get a buy-2-let mortgage which again should be easy enough to get through a newly formed Ltd company with no trading history as long as the expected rental income is >125% of the interest only part of the mortgage payments. You will then use this mortgage to pay off the bridging loan and the loan you have received from one of the company directors. Hopefully you will have a bit left over which you can pocket as well. You will also be left with 15% of the value of the property in equity.
Hope this helps.
Eric Mc said:
The company currently carries on a a non-property related trade (I assume).
If it starts "trading" as a property developer as well, it will now have two trading activities rather than one. This will need to be reflected in the accounts of the company and separate profits calculated for both activity. The Corporation Tax position of the company will also be more complicated - especially if one activity results in a trading loss and the other results in a trading profit.
If it starts "trading" as a property developer as well, it will now have two trading activities rather than one. This will need to be reflected in the accounts of the company and separate profits calculated for both activity. The Corporation Tax position of the company will also be more complicated - especially if one activity results in a trading loss and the other results in a trading profit.
Eric - would you say that in this situation it is better then to start a new company to deal with the seperate trading activity, or deal with the extra complications that arise in the accounting? I would have thought it better to start a new company myself, but then I am definitely not an expert!
Eric Mc said:
I would agree that having a separate Property Development company would be a better way to tackle this - although I would always want to know why anyone partcularly thinks that a limited company is the best vehicle for this typer of project.
I see. I was asking because myself and my business partner (in my photography Ltd Co.) are quite keen to go off on another tack, but with something unrelated to photography. I have emailed my accountant with the question this morning, so I will see what he says. Where is a good place to find out about what sort of vehicles are suited to what sort of businesses? I must admit that when we set up a Ltd company a few years ago we did not research the options! I think we thought that it just sounded the best
Eric Mc said:
I would agree that having a separate Property Development company would be a better way to tackle this - although I would always want to know why anyone partcularly thinks that a limited company is the best vehicle for this typer of project.
if not a Ltd Co., then what would you be suggesting Eric (assuming not wanting to do it as personal venture with all the potential non-limited liability risks)?
A personal venture might be easier to admininistrate, although the benefits of limited liability would be lost, of course.
It depends on how important limited liability are to you. If you do go down the limited liability route, but have to place personal guarantees on any borrowings, or accept a legal charge over personal property, then the benefits of limited liability will be seriously eroded anyway.
It depends on how important limited liability are to you. If you do go down the limited liability route, but have to place personal guarantees on any borrowings, or accept a legal charge over personal property, then the benefits of limited liability will be seriously eroded anyway.
I do it a different way. I have a very good relationship wiht my bank. Wife and I have had a personal banker @ Yorkshire Bank for 5 yrs or so. They lent us a lot to do up our last three houses. When I saw a project (plot of land) they approved a facility, securing it against the plot and my house. We have just done the same for another house and, becasue our main residence has a large amount of equity, thye are fully financing purchase and refurb - but the key is the personal banker and th ecommercial banker at Yorkshire trusting me and knowing the value of property in Harrogate.
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