Deed of Trust V Ltd company purchase

eyhorne

Hi all,

We were given first refusal on our neighbour's house after she passed away in April.We are in fortunate position to be able to buy it as a private sale with no mortgage along with other family members (6 in total).

My sister-in-law is a first time buyer and the solicitor suggested we have her on the Title deeds as she will have a reduced SDLT liability (saving £9k) and then they are drawing up a Deed of Trust for us to have a record of who has an interest in the property. This will then be registered with the TRS service.

Our plan is for the house to be let as a holiday let, so sis-in-law will not live there and it won't be her principal residence. 

My brother-in-law suggested we look into buying as a Ltd Co as he has done that with a house he inherited from his father, hence my question. We already have a Ltd Co as hubby is a builder. I manage it and do the accounts so I know what's involved on that side, just not for this type of transaction with lots of people involved.

I just don't want to forge ahead with this plan (Deed of Trust etc) and have someone say after the event 'Oh, you should have done it THIS way!'

Any thoughts as to the best way forward for this purchase?!

NorthYorkie

  Re SDLT first time buyers relief "From  1 April 2025 the relief applies to purchases of residential property for £500,000 or less, provided the purchaser intends to occupy the property as their only or main residence."

As your sister-in-law will not be occupying the property, any claim for relief will be fraudulent. Does your solicitor know that she will not be occupying the property?

eyhorne

Yes they do. They have not commented on this so I'll enquire with them further. 

SDLT_Geek

eyhorne said:

Hi all,

We were given first refusal on our neighbour's house after she passed away in April.We are in fortunate position to be able to buy it as a private sale with no mortgage along with other family members (6 in total).

My sister-in-law is a first time buyer and the solicitor suggested we have her on the Title deeds as she will have a reduced SDLT liability (saving £9k) and then they are drawing up a Deed of Trust for us to have a record of who has an interest in the property. This will then be registered with the TRS service.

Our plan is for the house to be let as a holiday let, so sis-in-law will not live there and it won't be her principal residence. 

My brother-in-law suggested we look into buying as a Ltd Co as he has done that with a house he inherited from his father, hence my question. We already have a Ltd Co as hubby is a builder. I manage it and do the accounts so I know what's involved on that side, just not for this type of transaction with lots of people involved.

I just don't want to forge ahead with this plan (Deed of Trust etc) and have someone say after the event 'Oh, you should have done it THIS way!'

Any thoughts as to the best way forward for this purchase?!

It would be very wrong for first time buyers' relief to be claimed in this scenario.  Quite apart from the fact that the sister in law will not live there, she would not be the only "purchaser", as the others with beneficial ownership count as purchasers for SDLT.

The extra 5% SDLT would apply whether it is bought by all six family members (assuming at least one of them already has a property) or by a company.

One advantage of a company buying would be that sister in law would preserve her status as a first time buyer for SDLT and not be liable for 5% SDLT if and when she comes to buy herself.

It is likely to be best to speak to an accountant as there will be implications for the taxation of income and gains.

Keep_pedalling

Why do you think this is a good idea? Do any of the 6 have any experience in being a landlord? What happens one of you needs the money and wants out. 

poseidon1

@SDLT-GEEK has already comprehensively commented on the unlawful SDLT avoidance aspect involving FTB relief (proposed by a solicitor ), so I will restrict my comment to the alternative investment company suggestion.

It's complicated with double tax issues at stake. I note you handle the  accounts and company compliance for your  husband's building business so are you inferring you would take this on for a new property investment company?

You will have to first decide whether the new company will be established by shareholder equity or loans from the participants.

Whatever route chosen, a shareholder agreement may be needed to determine how shareholdings should be dealt with on death (and other events) of a shareholder.

Once the investment is established and profits arising after corporation tax ascertained , how will the participants be 'rewarded' ?

Annual dividends ( taxable) or drawdown against shareholder loans (non taxable ) if the loan route is used to capitalise the company. Would you and your partner expect to be remunerated for running this venture, thereby increasing your take from the business to detriment of the other participants?

Given that the participants to this venture could quite easily divert their personal savings to tax free savings in ISAs, how does the taxed and taxable income streams from a  property company compare to what they could each achieve ( risk free) from cash ISAs? Was such an analysis even undertaken when the proposed participants were approached with this joint venture proposal?

In this regard, I note from your past post your original plan was for you and partner to try and take on this project yourselves, but raising the mortgage loan financing may have been a challenge. Instead you have now presumably  solicited access to various family  savings, so I am curious what was the nature of the financial benefits you felt they would enjoy by being party to this venture?

As for future potential capital gains, a company structure has a  distinct double tax disadvantage. Eventual sale of the property at a gain, would trigger corporation tax at company level. Once the company is then liquidated the shareholders may then face personal CGT exposure on the base cost of their shareholding as that compares to their liquidation proceeds.

In view of the above, purchase in personal names ( subject to deed of trust), would be cleaner and more tax transparent/efficient.

However, I share Keep_pedalling's doubts and concerns about the entire wisdom of this venture, especially how it will impact on family members future tax compliance and access to capital.

If some of them are not self assessment tax return filers, do they understand this will be a requirement for reporting their shares of the business income, or will you undertake to do this for them? What if one or other requires access  to their capital share, do they all fully understand the implications of investing in an illiquid asset?

Seems to me a full detailed written analysis of pros and cons of this venture is needed, so the family members can go into this properly informed,  and not simply the comparison of Corporate v personal ownership which you have raised here.

loubel

It sounds like you need a new solicitor...