Turbocharge Your Property Investment Company With A Qualifying Loan
One of the biggest limiting factors for a property investment company is its access to funding. Many property investors have built up significant equity in their own residential mortgage or in personally help buy to lets. It can make sense in some circumstances to refinance these properties and introduce this capital into your property investment company in order to fund further purchases. The good news is that in many cases this will be classed as a qualifying loan and result in interest relief.
What is a qualifying loan? individuals can claim tax relief for interest paid on a loan where the funds are used by a close company for business purposes. A close company is privately owned with 5 or fewer participants (most property investment companies are close companies). Personal loans such as mortgages and other loans would qualify, although importantly there can be no tax relief on overdraft interest or credit card debt.
How would this work in practice? An investor would make the decision to borrow additional funds for example against their private residence and then loan this additional money to their investment company. The company would then have a new liability (something it owes) for the amount of the loan. The company would pay interest on the new loan, which could be a similar amount to the mortgage interest payment. The company would be required to make a 20% tax deduction and report to HMRC via a CT61 form. However the individual would be able to claim this 20% back on their self assessment tax return, making the transaction tax neutral.
Are there any other Issues to consider? Despite the fact it is tax neutral there is clearly a cashflow issue created as there will be a time lag between the company deducing interest at source and the investor being able to reclaim on their self assessment tax return. There is also the issue of additional paperwork by having to submit quarterly CT61 submissions to HMRC.
Is there a limit on how much tax relief you can claim on qualifying interest? Tax relief on qualifying interest is capped annually at the higher of £50,000, or 25% of adjusted net income. This should give a good amount of wiggle room for most property investors depending on their individual circumstances.
Conclusion. Qualifying loans can be a powerful way to introduce capital into a property investment company to enable you to scale your business and will mean that the property investor will benefit from tax relief at the same time.
Why not book a discovery call below to see how you can introduce a qualifying loan into your property investment company.