The mortgage lending market in the UK is reaching new highs of competitiveness as lenders seek to maintain volumes and do so whilst maintaining or improving their income.  One way that they do this is to be more accepting of clients with some credit impairment and another is to provide innovative solutions that help very specific client needs. 

I came across a helpful solution offered by a lender just recently and certainly something that might help others as they consider future property options.

The client was late 20’s and owned a modest apartment value £100,000. He was looking to move in with his new wife and purchase a new property valued at £325,000. All good so far, and they had the savings and salaries to support their mortgage.

However, the client wanted to keep his apartment, which was in a good rental location as he could achieve a monthly rental of £625, which he considered a great return on his investment. He was also looking at the future capital growth on the property, which was based in an area where future developments would add to the overall value of the housing stock. 

The problem that he faced was that if he did not sell his flat the new property would be classed as a second property for stamp duty purposes and a 3% Stamp duty premium would become payable – stamp duty of a whopping £16,000 instead of just an eye watering £6,250.

There was no way that they could afford the additional £9,750 of stamp duty and so the decision he made was to sell his original property.
 
Well this was the case until we decided to explore what other options might be available.

At the current time, we are seeing increasing numbers of buy to let landlords incorporating and buying or transferring their rental properties into new limited companies. This is driven largely by recent tax changes and the treatment of mortgage interest – the ability to offset this in full against rental income. The thought process was to transfer the property into a new limited company as it would also be useful in this case.
 
The solution was as follows:

The client formed a new limited company and transferred his property to it with gifted equity of £50,000 and a new replacement limited company buy to let mortgage of £50,000. The company showed the gifted equity as a directors’ loan which had the added benefit that drawings (surplus rental income) up to this level can be taken with no taxation payable. Stamp duty was payable on the market value at 3% = £3,000 and this was an additional cost but considered acceptable. 

The client now no longer owns a property and so can purchase the new property with his partner without payment of the stamp duty second property premium. They pay standard stamp duty on their purchase of £6,250 just as they would if the apartment had been sold.
 

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