Using Limited Companies To Buy Investment Properties

Trust Deed

A common complaint small property investor’s encounter is that they are not able to purchase property through a limited liability company as banks are usually not willing to provide mortgage finance.

The principal reason for this is that the company would be liable to repay the mortgage debt. If the company was to go insolvent then the bank would not have any redress against the company shareholders as their liability is limited to the amount of money they paid for their shares.

As banks do not like risk they will never lend to small companies without the shareholders of the company providing a guarantee to the bank that they will repay the company’s debt if the company cannot….and if you are lucky enough to obtain financing under this arrangement your company will probably be paying an extortionate interest rate and will have to find a bigger deposit than the normal 15% you have with standard buy to let financing.

The net result of this is that because of all the extra paperwork and legal technicalities banks need to arrange and put in place in order to lend to small companies they would simply rather not do so.

This is a shame for the small investor as there are many tax (and other) advantages for owning property through a company. It is not our intention to go into the advantages here; you can discuss this with your accountant.

However, there is a simple way to take advantage of the tax breaks corporate ownership offers without going through all the hassle of begging your bank to give you a mortgage, granting guarantees and creating extra paperwork. You simply create a trust splitting the beneficial title in the property from the legal title.

The trustee will be the investor and the beneficiary of the property will be the company. The trust deed states that the trustee has entered into the purchase contract at the request of the company and that the trustee will own the property on trust for the company. The trust should be dated before the date you exchange. Strictly speaking you as the investor may need to seek your mortgagee’s consent prior to you make this transfer through the trust deed as your mortgage may prevent this transfer. We suggest you review your mortgage deed to see if this is necessary.

Once the trust deed has been entered into then the company will be beneficially entitled to all income, rent and proceeds of sale generated from the property and consequently it will be taxed on these monies at the relevant corporate rates. The company can also use any relevant deductions in relation to these monies. Your accountant can advise you further on what deductions are allowable.

Our recommended trust deed agreement can be ordered from -> http://www.property-system.com/index.php?pageid=investing