BACKGROUND:

I have been thinking this through for the last couple of days and would appreciate comments from experienced NMD investors.

One of our properties recently was bought using an assignable contract. This would have allowed us to resell the property without owning it. Unfortunately, we were forced to complete because our new buyer was taking too long and our vendor was close to repo. We completed the resale shortly after.

What I learned was that I could have exchanged contracts and then let the other buyer complete. I would have received the difference between the exchange price and the completion price. i.e. Buying and Selling the property, without incurring financing costs or stamp duty.

All it took was a 2 minute phone call to our solicitor to ask for the Assignability Clause to be inserted.

WHY?

We are very restricted and in a way, vulnerable, when we only have one lender to deal with.

In some circumstances, it would be very beneficial to have access to the whole BTL market.

It would also be good not to have to pretend we own properties and are remortgaging when it comes to surveys.

HOW?

I believe that I could secure properties in the name of A with an assignable contract and on the day of exchange/completion have the contract assigned to the name of B.

A would be my limited company, B would be me.
Or
A would be me, B would be a JV partner or vice versa.

B would be able to purchase using a standard BTL purchase mortgage, maybe even 90% LTV, maybe with better suitability than MX.

Tax and Financial Implications:

1) Cash out, ie difference between BMV price and MV would become a taxable gain to A. ie 8%MV (around 40% of 20% BMV). The assignor of the contract could agree to pay all transaction costs (val, sols, SD, mar etc), reducing profit by around 5%MV in turn reducing the possible tax due to 6% (around 40% of 15%BMV).

2) Stamp Duty would be due on the higher PP by B a difference of 0.2%

3) Capital Gains tax upon resale would be mitigated by around 3.6%MV (18% of 20% BMV) as this would be calculated from the PP.

4) Bridging costs would no longer be necessary, saving 0.5%

1) + 2) -3) -4) = 2.1%MV, this is how much worse off we would be.

Implementation:

I believe that this strategy could be particularly effective when supported by 90% BTL lenders or 85% lenders with relaxed rental criteria.

Having access to 90% LTV products for NMD deals would result in us cashing out an extra 2.9%MV (5%borrowing - 2.1% costs). This may make a BTS or a refurb possible, when we couldnt have done it with MX.

It may even be possible to alternate the A and B purchasers so that the profit and loss balances out and results in a smaller tax liability.

Consultation:

Upon googling, I have found that GMAC specificially preclude the lending, where an Assignable Contract has been part of the transaction. I think that this refers to new builds, but do any other lenders have a stated policy about this?

Do any of the community's more experienced investors have experience or knowledge about assignable contracts?

Any financial implication I may have missed?

This could either, be tremendously powerful and completely revolutionise things, or it could be yet another of those wacky ideas, that will pass when he has caught up with his sleep!

Phil

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Morning Phil.

Is there not an inherent problem with this in so far as other lenders will only lend 90% of either the value or the purchase price on a conventional BTL mortgage, whichever is the lower - hence the ongoing need for bridge and remortgage? In the case of a NMD purchase, the PP will always be lower than the property's OMV and thus the buyer will be permitted to borrow 90% of the PP only, as opposed to a 85% LTV remortgage product with MX based on OMV, therefore requiring a 10% cash deposit. That said, I'm not a broker so there may be products on the market which permit this type of borrowing; obviously with which I am not familiar.

In terms of the tax and financial implications, if you are using an assignable contract with a right to buy from your Limited Company, then I fail to see the benefit unless you intend to flip the property; in which case I would use the Limited Company entirely as this will incur Small Companies' Corporation Tax at 20% and not the higher rate of Income Tax at 40% on any part of the gain, notwithstanding your N.I liability, as an individual.

Conversely if you are buying a property to hold as a rent back or BTL, including via an assignable contract from a JV partner, why involve the company at all? From 6th April 2008, you will only incur 18% CGT on your gain when the property is sold providing you hold the asset for long enough for it not to be considered as a BTS. This is less than the CT rate above. Regarding stamp duty, unless you're assigning the purchase to another investor, why use a company as an intermediary effectively increasing the PP upon which you will pay the tax?

__________________
Max Harris
07815 157755 - Please feel free to call, Skype or PM me for an informal chat.
COMPLETE BMV PACKAGING :- RMDs, Fee Free Broker, Closed Bridging & All Legals £395 + VAT.
WANTED: BTS Deals, Land and Developments in London & SE - Generous FFs Paid - Capital for JVs.

Max,

Thank you for your reply.

The benefit is that the PP that B is paying will be the MV. Therefore that is the BTL mortgage PP.

I understand and appreciate your input, regarding ltd co, but A doesn't have to be a ltd co.
That is just a suggestion, A could be an individual.

I am not talking about holding the prop in a ltd company or flipping it on, in fact A never owns the property at all.
What I am proposing is for entity A to pass the exchange contract to entity B, allowing max financing potential and all gain remaining with A.

Best as Always,

Phil

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Thanks Phil. In respect of the use of a Limited Company in your example, I was pointing out that if A is passing an exchange contract to B - regardless of whether B is you or another investor - then A should always be a Limited Company as the gain realised between the PP and the MV will be taxed at a lesser prevailing rate than the individual; i.e. 20% as opposed to 40%. I obviously appreciate that A never in fact owns the property, as is the case in every instance where an assignable contract or purchase option agreement is used to pass on property to another investor for a premium. I use these practices myself.

I think your concept is entirely plausible and may indeed negate the need for closed bridging. However my only thought would be that if you were passing a property from an entity you control to yourself, in order to artificially increase the PP for the purpose of obtaining finance on the higher OMV figure with a conventional BTL mortgage product, then this may be deemed as 'transfer pricing'. Obviously this would only apply to the transfer of pricing between entities that you control - and not between A and another investor with no vested interest in A.

Best regards.

__________________
Max Harris
07815 157755 - Please feel free to call, Skype or PM me for an informal chat.
COMPLETE BMV PACKAGING :- RMDs, Fee Free Broker, Closed Bridging & All Legals £395 + VAT.
WANTED: BTS Deals, Land and Developments in London & SE - Generous FFs Paid - Capital for JVs.

Fantastic!

Very useful information Max.

So if A is a ltd co and B is a JV partner (not a director or shareholder of A), it would work.

What did you think about alternating the A and B purchasers so that the first deposit can be recycled and profit and loss evens out?

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Absolutely, why not?! If A is a Ltd Co and B is a JV partner with no declared interest in A, then in my view it would be an entirely legitimate transaction between two separate parties in every case - much the same as passing on a RMD through an assignable contract or purchase option agreement to a third party, without you or preferably your company as the intermediary ever owning the property in transmission.

In terms of recycling the deposit and alternating the A and B purchasers to even out profit and loss as you suggest, because of very same justification that should allow you to conduct and obtain finance for the transaction in this way - namely that you are unrelated parties - I assume this would be contradictory to that. You could perhaps structure it as a 'loan' from A to B to be repaid with a small interest payment to make it legitimate - I'm not sure to be honest Phil, you'd have to look into that one further. I'd obviously be interested to find out vis-a-vis the potentially excellent implications...

__________________
Max Harris
07815 157755 - Please feel free to call, Skype or PM me for an informal chat.
COMPLETE BMV PACKAGING :- RMDs, Fee Free Broker, Closed Bridging & All Legals £395 + VAT.
WANTED: BTS Deals, Land and Developments in London & SE - Generous FFs Paid - Capital for JVs.

Hi Phil,

Good to see people looking for alternatives, I agree it is risky being tied to a single lender. I am meeting several brokers and packagers on Thursday to discuss viable alternatives in case MX pull out of immediate re-mortgage.

The main problem with your example is cost. If A sells on an assignable contract to B then there would be a tax implication. I suspect this would be classed as trading and not capital gain and therefore liable to your own taxation rate.

Even if you can put this through a person or company on low rate, say 20%, then the cost would still be high.

Example
OMV £200k
PP £160k

Tax liable = £40k * 20% = £8k

This is quite a chunk to add to your purchase costs and far higher than a traditional bridge route.

Another possible problem is that many lenders stopped allowing back to back/ sub-sales after mass frauds in the early 90's.

I think your idea does have potential and is a possible alternative in case of future problems but it does have it's own drawbacks as mentioned above.

It is good to throw the ideas around amongst ourselves though and try to come up with alternatives.

I realise I may seem like a vested interested here but in reality I am primarily an investor and am very interested in all ideas pertaining to financing acquisitions.

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Philip,

Sometimes, when I see really brilliant ideas, I save them to the laptop. The original link to this post a few months ago is broken (perhaps the article has been archived or removed) but with thanks to Dave Coughlin, I reprint verbatim here below:

Exchange in Ltd Company Below Market Value and flip to yourself at Open Market Value. Your Ltd Company can agree to 'quash' its exhange contract [release its interest in the property] in return for a finders fee [£(Open Market Value-Purchase Price)] so in affect you complete with the vendor at Open Market Value and they pay a finders fee to your Ltd Company. This is a twist on the direct flip from Ltd Company to yourself but still works just the same.

Tax in Ltd company is 23%(?) and you can offset that tax by paying all costs/expenses for the deal and future marketing from Ltd company. Therefore your profit is taxed much less than the usual 40% [should be zero]

It is as simple as that really - have a few coffees!

__________________
Just because you are not paranoid, it doesn't mean they are not all out to get you

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Phil,

I also heard about this from Dave and agree it is a good method as long as it is arms length like Max said. A & B cannot have a vested interest. This is easy to get around. Simple method would be to create a Ltd or add a Director to it that you know which will just purely be there so to make the transaction arms length.

If you are using your Ltd as the marketing machine, then depending on how much BMV you agree your deals, the tax implications can be eliminated via your trading costs associated with the Ltd. My gut feel is that if you are doing well in this business, your cash out should well exceed your expenses, meaning you are ultimately going to be paying tax on refinanced monies!

So it might only be a case where you use this immediate flip to yourself method on a deal by deal basis.

__________________
Robby
PM me for details of our UK Wide packaged deals

VERY interesting subject people and one that i dont pretend to have any knowledge in!!

how easy is it to get a BTL mortgage in a 'company name' bearing in mind the company has only been trading 18 months and not made any massive profits!

Would the company not need to provide the deposit monies before exchange could take place meaning you couldnt exchange without the deposit in place? I asume this is the case but the deposit just sits with your solicitor until you assign the contract and someone else (you) takes the deal and pays the FF?

Shane,

I have just initiated one this morning, and having spoken to both our solicitor and broker (who don't normally do this kind of thing), they are both of the opinion that provided the property values at the OMV, and that our company legally declares its finder fee in the transaction, we can do it. In our case, this is not a NMD, and we have the fall back position to sell it to ourselves if our third party customer, for whatever reason, can't complete.

This is a two pronged strategy. The main objective is to take an "internal" finder fee, and the second objective is to obtain an effective 95% BTL mortgage. I'm not as clever as those NMD guys, so I have to learn this slowly by doing it, not by thinking it on paper.

__________________
Just because you are not paranoid, it doesn't mean they are not all out to get you

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Shane, the company does not need to get a mortgage if you use it purely to exchange in. It will then assign it to someone else [you/partner/JV partner] where it generally would be in their personal capacity as you probably do now with your BTL's.

Deposit monies are also not required. You can do an immediate exchange with a £0 deposit or £20. What ever suites you best. The only time a deposit is required is to the end buyer. In other words, person/entity that the deal is being assigned to. The monies will need to be handed to the solicitor as per usual since it is a deal where you are now buying at full MV. However, once the sale goes through, the difference between the agreed price and the MV will be paid to the assignee [generally your Ltd]. This is now the deposit money that is gonna need to be cycled around if the process is repeated but there will be tax implications you must look into. This fee handed over to the Ltd is deemed as income and taxed accordingly where as it you did a bridge, it is cash back and not taxable since the source is from a loan.

Hope this makes it more clear to you?

__________________
Robby
PM me for details of our UK Wide packaged deals

If you did a conditional exchange you should be fine and not be in a position where you are forced to completed if the end buyer [assignee] does not buy.

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Robby
PM me for details of our UK Wide packaged deals

i asume the vendor need to agree that they will exchange with no deposit to enable you to flip the exchanged contract to another party?!

Very interesting proposal Phil...and great debate guys, I will be following this thread with interest..

Regards

Jai