Buying property through a limited company: the importance of a loan agreement

In this scenario, it is vital that the personal funds are protected by a loan agreement between the individual and the company, even where the individual is the sole director and shareholder of the company.

Although the need to document a loan between two parties who are essentially the same may seem illogical, because a limited company is a separate legal entity from its owners, any money it receives by way of a loan should be documented. Failure to do so may lead to the loan being interpreted as a gift by HMRC, leading to adverse tax implications. 

Also, where the funds being provided are from another company (an inter-company loan), a failure to have a loan agreement in place may lead to HMRC determining the loan as an attempt to circumvent dividends tax, which would result in financial penalties.

On the part of the director or shareholder, entering into a loan agreement provides security for the personal funds that the company is using for the purchase. 

This is because, without a suitably drafted loan agreement, the personal funds given to the company are totally unsecured, meaning that if the company was to run into financial difficulty in the future and be litigated against, the personal funds loaned to the company will not be ringfenced against secured creditors such as mortgage lenders making it very difficult for the director to recover their personal funds. 

Where possible, the agreement should also be registered at Companies House, though some mortgage lenders will not allow this.

What should a loan agreement include?

The loan agreement should set and confirm the following aspects of the loan:

• The amount of the loan received by the company.
   
• The purpose of the loan, such as the deposit for the purchase of a property.
   
• Any interest that is payable on the loan. An amount of the interest accrued on the loan is also tax-free for a director, a point on which an accountant can provide further advice.
   
• The repayment provisions of the loan, such as whether repayment will be on-demand, subject to a fixed monthly amount, or an amortised loan documented with a payment schedule.
   
• Events of default, determining which circumstances will lead to a failure on the company's part to keep to its obligations, most likely being a failure to adhere to repayment terms.
   
• Termination provisions, which could give the company and the director the flexibility to terminate the loan on the earlier of full repayment of the loan or an earlier settlement of the loan.

In summary, where large sums of personal funds are used to purchase property by a limited company, directors and shareholders must bear in mind that although they own the company personally, their personal funds are being loaned to a separate legal entity. 

Therefore, to ensure that the personal funds are suitably ringfenced from creditors if the company faces financial difficulties in the future, a properly administered loan agreement is vital to ensure that the personal funds are ringfenced.

Buying property through a limited company

It used to be the case that only a small percentage of investors would buy properties through a limited company, but the buy-to-let market has transformed in the last few years.

If you are considering this approach, you may be interested in viewing our free online seminar, which examines the legal pros and cons.

Seminar: Buying a property through a corporate vehicle

Contact our property solicitors 

The process for purchasing property through a corporate vehicle is far more complicated than a standard conveyancing transaction, and we have extensive experience in this area.

Our team of property solicitors in Brighton, Eastbourne, London, Hastings and Uckfield can help you understand your options.