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How to use bridging loans to move your portfolio to a limited company
For many professional landlords, the decision to move their property portfolio to a limited company is no longer a choice, but rather a strategic move for their rental yields and profit. Yet, with the restriction of mortgage interest tax relief becoming stricter, it has made personal property ownership more expensive, especially for higher-rate taxpayers.
However, there are logistical obstacles that can make deciding to incorporate more complex. As transferring a portfolio is a major commercial transaction, you will need to navigate taxes, fees and traditional banks, which can become costly. This is where specialist bridging finance becomes a necessity and can make the process much easier.
Why incorporation is harder than it looks
When deciding to incorporate your property portfolio, on paper, it can look rather simple as a tax strategy. However, in practice, it can be an expensive and difficult hurdle that can drain your cash reserves quickly. Equally, rather than it being an administrative task of changing the title deeds, incorporating your portfolio requires your new company to purchase the properties from you, just as it would in any normal transaction.
Capital gains and Stamp Duty tax
Because of this, when you sell to your own limited company, HMRC will treat it as a market value transaction. This means that your company will be required to pay Stamp Duty Land Tax (SDLT), as well as a 5% surcharge for any additional properties you may own.
Equally, you as an individual may be required to pay Capital Gains Tax, as you could have potentially made a profit on the sale of your portfolio.
Refinancing bottleneck
You cannot simply move your personal mortgages over to a company. You will need to redeem your existing mortgage loans, which could trigger an Early Repayment Charge, and take out new corporate finance.
Another major obstacle is the Day 1 SPV issue. High street banks and traditional BTL lenders are often reluctant to lend to a newly formed Special Purpose Vehicle (SPV) with no trading history, or to a company that has only just acquired the title, typically requiring a seasoning period of 6 to 12 months before considering a long-term mortgage.
Bridging finance helps to provide the immediate capital needed to complete the transfer to an SPV, and allows you to bypass the initial requirements of a traditional lender, giving you the time needed to establish your company’s record while your tax strategy is in motion.
How to use bridging loans to finance the move to a limited company
One of the main benefits of a bridging loan is speed, especially when traditional finance is often too slow or rigid to allow the completion of a portfolio transition to a limited company to happen. Equally, the flexibility of a bridging loan can make the process much smoother and reduce any potential delays.
Releasing equity for tax liabilities
Instead of you selling off your assets to pay for the SDLT and Capital Gains Tax, a bridging loan is designed to release equity from your current portfolio. This allows you to have access to the funds needed to settle any tax bills immediately, and allows the transfer to proceed without delay.
Acting as a chain breaker
When transferring your portfolio to a limited company, solicitors will often require any personal mortgages to be settled before the new corporate deeds can be registered. Using a bridging loan for this allows you to pay off your mortgage lenders quickly, and ensures that the restructuring of your portfolio doesn’t drag on for months.
How KSEYE can help with your transition
At KSEYE, we are specialists in helping investors secure short-term funding to move their property portfolios to a limited company. With our dedicated team of in-house underwriters and legal professionals, we have the capabilities to review your application and make a decision quicker than traditional lenders. This ensures that your transition goes smoothly and reduces the potential for financial delays.
If you’re looking to transition your property portfolio to a limited company, speak to our team of BDMs today.