See how we got a family their dream home when their income on paper was low for tax efficiency.
Background
The client who is a successful company director and his wife were looking to buy their next home which was a lovely 3 bed property in Chislehurst for £945,000, they needed to be able to act quickly and wanted to keep their existing property in London as an investment. The client also wished to be able to make further property investments in the future too so we needed to be able to advise with future goals in mind.
They had savings of £60,000 that would be used for some of the deposit but needed a solution on where to raise the rest of the deposit required.
Both clients were extracting income close to the high rate tax band so any future rental income would be taxed at 40%.
They came to us as we were specifically able to advise on this complex transaction being specialists in self employed income…
Challange
There were a few challenges that we needed to overcome;
- Raising the funds required meant using a lender that would understand the company’s position overall rather than what they extracted from it.
- As the large loan was over £500,000 there were restrictions placed on the lenders with the loan amount required and the loan to value.
- The client was going to extract funds from his company for the deposit of the property which would of cost a significant amount in tax.
- stamp duty implications and further property purchases given the clients current income would all have had tax implications for the client so we needed to be able to collaborate with our tax specialist partners to come up with a tax efficient solution.
- We needed to raise the funds required on the existing property which was of non standard concrete construction
- The clients current mortgage was also in a fixed rate and there would have been early repayment charges that would need to be accounted for unless we can find a solution.
The rental income available on the existing property was lower than needed to be able to raise the funds required with most buy to let lenders so we needed a lender that would stretch the borrowing on the current rental income
Solution
The solution was two pronged;
Sale of existing property into a limited company and associated remortgage at 75% loan to value.
The client was unaware that they would be able to capital raise against their existing property, so they were intending to extract the funds out of the company but this would of attracted a higher tax rate, instead we used the savings that we already had available and then raised the additional finances we needed from the existing property.
We were able to raise an additional £104,000. We transferred the property into a limited company, this meant that the client would be able to take advantage of current tax rules in regards to the future rental income not only for this property but for future property purchases.
It also allowed us to efficiently move funds over from the trading business to the new limited company for the purposes of paying stamp duty and funding new property purchases.
Transferring the existing property into a limited company meant that stamp duty would be payable on that transaction but it also meant that the surcharge on the new property would not apply, if we had kept the property in the clients personal name then they would of paid £66,250 stamp duty but we saved them £6000 on the overall stamp duty liability by transferring to a limited company.
We also used a lender that would be happy to lend on the concrete construction.
Onward purchase mortgage at 85% loan to value for a total loan of £803,250
We recommended that we port over the clients existing loan, this meant we could avoid early repayment charges totalling £5880 and also we could keep a low rate of 1.54% in place for £196,005 of the borrowing, the remaining £607,245 would then be on a competitive rate of 1.68%.
We also had direct access to the underwriter and the high value loan team so were able to get them to consider the case on the basis of the clients net profits within the business as their income rather than what they had extracted as salary and dividend, this meant we could evidence a far larger income.
As we had managed to raise enough funds from the existing property this allowed us to reach an 85% loan to value which gave us access to some of the best rates and due to the income and deposit meant we could also access 5.5x lending which helped us in the affordability.
Results
- Got the property the client desired with a loan of £803,250 while the actual income was £95,000
- Saved £6000 on stamp duty
- Saved £5880 on early repayment charges
- Saved £39000 on potential personal income tax from not having to draw £104,000 out of the company
- Set up a tax efficient vehicle for the new rental property and future property’s
