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Writer's pictureJonathan

Lower ADS - Retain your property - Buy a new one



Back in the day before section 24 and long before Additional Dwellinghouse Supplement (ADS) , this was a strategy for many buy to let investors to increase their portfolio. They would buy a property to live in as their residential property then rather than sell it and buy a new residential property they would convert that mortgage onto a buy to let mortgage and buy a new residential property. This strategy, however, has taken a bit of a hit since the introduction of the ADS which is a 6% tax payable on the purchase price in Scotland and a 3% tax in England when you buy a 2nd property.


Whilst it is still possible to retain your existing residential property, convert the mortgage to a buy to let and then buy a new residential property, the main problem is that if you use that strategy then you will end up paying the 6% or 3% tax on the new resi property. The likelihood is that you are going to be going up the property food chain in terms of price so it doesn't make financial sense to retain a cheaper property and pay tax on the more expensive property.


It's a bit of a dilemma for a lot of our clients.


The solution may be to create your own limited company and get that new limited company to purchase your existing residential property. Yes, you would have to pay ADS but it would be based upon the purchase price agreed between the limited company and yourself. This would then free you up to purchase a new residential property without paying ADS.


Here are the steps


  • Form a new limited company with the correct SIC codes

  • Get a limited company BTL mortgage

  • Get the limited company to purchase your resi property at market value

  • Speak to your accountant about using the equity in the resi property as the deposit in terms of a director's loan - a lot of lenders will be ok with this!

  • You will need independent legal advice when signing the personal guarantee

  • Sometimes a lawyer will act for you as an individual and also the limited company but the lender may insist on separate representation

  • Speak to your accountant about Capital Gains Tax


If you would like to have a chat about whether or not this is right for you then please don't hesitate to pick up the phone.


Call Johnny - Start renting!


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