Company BTL Mortgage & Source of Deposit

Schwarzwald

I am about to purchase my first BTL.
I have set up a SPV/PropCo as UK Ltd (I am the sole director and 100% shareholder).
I have another Personal Services Company (UK Ltd) through which I invoice certain of my professional services (I am the sole director and 100% shareholder).

Assuming a 75% mortgage, I planned to fund the 25% deposit partly (e.g. 5%) from my personal account and the residual amount (e.g. 20%) from my ServiceCo.

I intended to provide the amount from my ServiceCo in the form of an unsecured loan, or similar, to the PropCo. I dont mind the form, but somehow I need to classify the funds when I transfer them from ServiceCo to PropCo (and from a corporate finance perspective I think they should be classified as a loan).

My solicitor has now raised concern that Lenders will not like that. I also read on another BTL Lender's website that "loans from another company won’t be accepted, however a repayment of a director’s loan or dividend payment from another limited company will be considered".

I am surprised by that and wonder how other PropCo BTL investors fund their deposits? In which form do they inject the initial deposit?
At least initially until the PropCo starts generating sufficient deposits thought its rental income to fund new purchases.

I want to avoid at all costs to pay out ServiceCo's funds to me personally as a dividend to increase the deposit coming from myself when I can actually just transfer the funds between companies.

My solicitor said that people fund the deposit for their first PropCo BTL from their personal accounts, which doesnt make any sense to me, these are two different legal entities .... the funds first need to flow to the PropCo and then to the Vendor, not from me personally to the Vendor (via solicitors).

What is market standard?
What do people to?

Thank you 

ACG

Could you as an individual take a loan from the first company and then pay that to the new company? 
Have you spoken to your accountant? 

Schwarzwald

ACG said:

Could you as an individual take a loan from the first company and then pay that to the new company? 
Have you spoken to your accountant? 

Yes, have discussed structuring with my tax advisor. He proposes the inter-company loan, but obviously he is not a mortgage advisor so the aspect that such inter-company loan is disliked by Lenders he was not aware.

Given the large amount and prolonged time a loan would be outstanding, HMRC would likely classify such a loan to the company's director/shareholder as a dividend and it would trigger a whole set of implications. In short, not desirable.

This most be a fairly typical structure, I wonder how other people do it?
The entire "pay it from your individual account to the solicitor" sounds and looks wrong to me, the Company is buying the property not the Individual .... 

kingstreet

The Ltd Co BTL specialists aren't normally phased by inter-company loans, but some of the high street BTL dabblers are.

Who is your broker suggesting?

kingstreet

For example, Precise requirement for deposit from inter-company loan;-

Please provide a copy of the signed Inter-company loan agreement form relating to this transaction, detailing the repayment terms of the loan. The loan needs to be repayable,  must include the interest rate, (which should be HMRC’s official rate of interest) and the loan term. The document must confirm the connected company does not have any interest or charge over the Bank’s security and should be signed. 

[Deleted User]

You are running in to the most common issue with these transactions which is that Accountants, Solicitors, and Brokers can only comment on their own area of expertise. 
Solicitor might be overstepping the mark a bit but may be just commenting in passing.  
If your tax advisor is saying it can be done then probably listen to them on that front.  A broker will be able to place the case once you tell them what you want to do, they wont be able to tell you the best way of doing it though as they arent tax advisors.  

Given the large amount and prolonged time a loan would be outstanding, HMRC would likely classify such a loan to the company's director/shareholder as a dividend and it would trigger a whole set of implications. In short, not desirable.

Presumably if you use the rental income from the new property to start repaying the inter company loan then it would be classified as a loan and not a dividend?  I assume its only an issue for the tax situation if its an open ended loan with no repayment terms? 

Schwarzwald

kingstreet said:

The Ltd Co BTL specialists aren't normally phased by inter-company loans, but some of the high street BTL dabblers are.

Who is your broker suggesting?

TMW is an option in consideration

Schwarzwald

Deleted_User said:

You are running in to the most common issue with these transactions which is that Accountants, Solicitors, and Brokers can only comment on their own area of expertise. 
Solicitor might be overstepping the mark a bit but may be just commenting in passing.  
If your tax advisor is saying it can be done then probably listen to them on that front.  A broker will be able to place the case once you tell them what you want to do, they wont be able to tell you the best way of doing it though as they arent tax advisors.  

it can certainly done from a tax perspective, and it is a clean way of structuring it.
It is more a Lender question. While junior to the mortgage and unsecured, they seem to look at it as 100% debt financing. Commercially this is not correct, but it might be a case of tick-the-box, also a case of more complex right exercise if the mortgage is not serviced as they might have to deal with another Lender on the corporate level .... 

Deleted_User said:

Given the large amount and prolonged time a loan would be outstanding, HMRC would likely classify such a loan to the company's director/shareholder as a dividend and it would trigger a whole set of implications. In short, not desirable.

Presumably if you use the rental income from the new property to start repaying the inter company loan then it would be classified as a loan and not a dividend?  I assume its only an issue for the tax situation if its an open ended loan with no repayment terms? 

I think above is mixing up the Inter-Company route and Company-Personal-Company route.

If Inter-Company, yes that works for HMRC, but tbd Lender.

If C-P-C, HMRC looks at it differently and might apply certain tax treatments, which are - while potentially only temporarily - very detrimental, e.g. 32.5% payment on loan amount.

kingstreet

Schwarzwald said:

kingstreet said:

The Ltd Co BTL specialists aren't normally phased by inter-company loans, but some of the high street BTL dabblers are.

Who is your broker suggesting?

TMW is an option in consideration

Deposit - "Loans from another company won’t be accepted, however a repayment of a director’s loan or dividend payment from another limited company will be considered"

Schwarzwald

kingstreet said:

Schwarzwald said:

kingstreet said:

The Ltd Co BTL specialists aren't normally phased by inter-company loans, but some of the high street BTL dabblers are.

Who is your broker suggesting?

TMW is an option in consideration

Deposit - "Loans from another company won’t be accepted, however a repayment of a director’s loan or dividend payment from another limited company will be considered"

yes i read that, but it doesnt make so much sense to me without speaking to them directly ... not sure why they reference "repayment of a director’s loan" here?

Thrugelmir

Schwarzwald said:

kingstreet said:

Schwarzwald said:

kingstreet said:

The Ltd Co BTL specialists aren't normally phased by inter-company loans, but some of the high street BTL dabblers are.

Who is your broker suggesting?

TMW is an option in consideration

Deposit - "Loans from another company won’t be accepted, however a repayment of a director’s loan or dividend payment from another limited company will be considered"

yes i read that, but it doesnt make so much sense to me without speaking to them directly ... not sure why they reference "repayment of a director’s loan" here?

I wouldn't concern yourself with this. As it's not applicable in your circumstances.