Investing in property with friends is it best to set up as a limited company

Hi Marie,

If the advice you have received is from a fully qualified and insured accountant who knows all your financial circumstances and understands property investment then fantastic as intrinsically there sounds nothing wrong with setting up a limited company for this purpose.

However, you should not act upon specific advice from anyone else, but you can obviously get ideas and guidance.

As a rule of thumb traditional BTL options for a company are more limited in terms of number, criteria and sometimes LTV, but it is still available as long as you remember to set up a SPV (single or special purpose vehicle) with one SIC code rather than a trading limited company.

There is extra admin and financial costs involved in using a company (especially the need to pay someone to do the annual accounts) as opposed to simply having a personal agreement, but the company route is probably tidier and easier to manage when you decide to go your separate ways or circumstances change. I've heard of too many examples where everything starts well between two siblings or a group of friends, and then goes pear-shaped when people move jobs, need money to set up home with a new partner, have children and so on. The limited company provides a useful discipline in reminding the parties that they cannot simply demand their money back at will, and that they need to take other people's needs and decisions into account as well as their own and not to take it personally if there are disagreements.

The limited company will also provide a useful mechanism for tax planning, as instead of receiving rent every month to add to your personal income - possibly driving you into the 40% tax bracket as mortgage interest will only be deductible at 20% from April 2016 - you can be "paid" in the form of dividends or company contributions to your private pensions schemes, or you can choose to pay down the mortgage debt if you prefer.

I have heard of people still getting personal BTL loans to buy property, rather than using the limited company which has no track record, thus giving them access to a wider range of mortgages. This is achieved by signing a Declaration of Trust via their solicitor after the property is purchased, stating that the property is owned by the individual(s) "on behalf of" the limited company. The property is still recorded under the individuals' names at the Land Registry, the mortgage is in their names, but the Declaration of Trust document demonstrates that the property is actually owned by the company. Of course all tax matters in future should be conducted via the limited company to confirm this, and the property should be recorded as an asset in the company's annual accounts so personal and company tax matters don't get confused.

Reply to the comment left by "Tony Atkins" at "06/10/2015 - 16:12":

Thank you Tony, very useful information. It's great to know that we are going in the right direction.

Reply to the comment left by "Neil Patterson" at "05/10/2015 - 16:54":

Thank you Neil, we did get advice from a qualified tax accountant but I wanted to do my own research as well and your comments have helped.

Reply to the comment left by "Tony Atkins" at "06/10/2015 - 16:12":

Tony, in the example you mention a deed of trust, is this a route that could be used to alleviate the effects of 'Clause 24', on an existing portfolio of about £1.8m (18 properties)?

I acknowledge that your not giving any financial advice- so feel free to comment.

Reply to the comment left by "Gary Dully" at "07/10/2015 - 16:42":

Gary, what is "Clause 24"? A reference link would be useful.

Tony, 'Clause 24' is what has got everyone into a lather, concerning the budget proposals.
Ie. converting finance costs from a business expense to taxable income for individual private landlords and just giving a 20% relief instead of 100% as we all get today.

It's clause 24 in the finance bill.

I would link, but I can't do any mouse work on an iPad so cutting and pasting is a nightmare.

Reply to the comment left by "Gary Dully" at "08/10/2015 - 09:37":

I thought it probably was, but hadn't heard the changes referenced to a specific clause before.

My view is that if a Declaration of Trust works for one house, then why not for up to eighteen? I'd talk with a good solicitor and accountant who are familiar with property and mortgage law. My main concern would be whether a Declaration can be made when you already own the property: it may be that it has to be made on the day of purchase.

The advantage to someone with such a portfolio is clear: if you are thinking of moving some or all of the houses owned personally into a limited company, a Declaration of Trust would allow you to redefine ownership for tax purposes without having actually to sell and re-purchase the properties via the limited company, thereby incurring stamp duty and legal costs and a whole load of hassle finding a lender prepared to lend to a new and unproven company.

Thank you Tony,

I need to see a good solicitor.

Hi Marie

A shareholders agreement is an agreement outside of the company which is a separate contract between the shareholders.

The agreement will deal with various matters about how the company is to be run and what the various responsibilities of the shareholders will be.

Whilst at the beginning everything is fine you probably do not need the agreement but you do have to be prepared for what happens when things change or go wrong. This is where the shareholders agreement comes in.

Like a partnership agreement a shareholders agreement is approximately 90% about what happens when there is a disagreement between shareholders.

This can be anything from one shareholder simply wanting to sell their share in the property and to get their money back to major disagreements where parties are not even talking to each other.

I suggest that you sit down with your fellow investors to decide what happens when foreseeable events might happen. (One person wanting to leave for example)

You then need to decide what happens if you disagree about something which you have not foreseen. Who will arbitrate and what are the consequences if one party does not agree with the result.

Once you have this then you can go to a solicitor to get the agreement drawn up. It will cost you money but it will be worth it in the event that anything goes wrong. The more you can give the solicitor at the beginning the less potentially you will be charged. However, having decided on a solicitor do take their advice - they have dealt with this type of thing before and you have not.

Other things to think about before putting the agreement together:

Consider having a different class of share for each shareholder - it may make the sale of the share in future easier if one party wants out.
Who are to be the directors and what are their different responsibilities.
Are partners/spouses allowed to own shares as well, now or in the future.
What happens if one party wants out and the other parties cannot afford to buy their share.
Who is responsible for the maintenance of the property and who deals with the tenants.
How do you extract profits from the company – dividends or salary. What happens if one person does not want to take their share this financial year.

It is essential to take advice and follow it but you must consider as many potential problems yourselves beforehand so you are prepared to deal with these as they arise.