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  • Mortgages & Finance

    Non Repayable Loan from Director to Company

    Hi Everyone,

    I am posting this question on behalf of a friend who is planning on investing in Property through her company. However, she has been asked by the Mortgage adviser to produce the legal documents substantiating the fact that the loan from herself, as a Director, will be non repayable and interest free. I wonder if someone knows whether a non repayable loan from a Director to their company is legal?

    Anyone come across similar situation? Any help will be much appreciated.

    Kind regards,

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    Hi  i'm not an accountant and have not heard of this type of request before from a broker.  Nevertheless, the money your friend puts into the property business for example as a deposit and /or to refurb the property will be classed as a directors loan to the company (the company owns the property not the individual director/s however the directors have put money in which the company owes them).  The directors can make withdrawals from the company on this loan if there is enough actual cash in the company, also they can charge the company interest on the money they have put in (their directors loan).  You would need to get advise on whether making this interest charge is a sensible approach in your circumstances.  Anyway I am assuming that the broker is requesting this information as part of a stress test (how much loan is covered by rental income) by the mortgage company ie. they are stress testing on the cost of the mortgage loan excluding any other interest charges such as on the directors loan.


    Hope this helps

    Adrian


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    The broker does not understand borrowings in a company.

    If you borrow money to fund equity often the equity funder needs to put in writing a waiver of rights to call on this money (ie prove it’s a gift). However for an owners loan to a company this is not just unnecessary but stupid and possibly very expensive. The owner may wish to pull out this money without tax. And even if you did agree to this (and make it permanent capital) it can always be converted back despite what the broker says.

    I would think very carefully about relying on this broker for company property mortgages.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    Hi Syeda,

    Do you know who your friend is borrowing through lender wise?  I'd suggest it's a lender and a broker who don't understand SPV/Ltd Company borrowing.  The fact is that the vast majority of landlords will wish to inject capital as a directors loan so that they can withdraw this capital injection without needing to pay tax, any accountant will advise this way where personal funds are being injected.  The vast majority of lenders allow this.  For a lender/broker to request this shows a flaw in understanding.  I'd find out who wants this and question it, because it should not be needed.

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    As per the other posts, this Is a ridiculous request, don’t do it and get another broker/ lender, better advice. A directors loan is a normal way to seed fund your ltd and is commonly used to inject funds to help cash flow later and as others have stated lets you draw you investment back out tax free when funds permit.  You should also have a contract with stated interest payments and term on the loan which must be realistic for the risk to satisfy HMRC especially if you aim to claim qualifying loan interest. Seek professional advice there are some tax benefits possible depending on how the loan is structured and how the funds are sourced by the director
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