Changing Your Company Structure When You Have Mortgages: What You Need to Know
As your property portfolio grows, the structure you started with may no longer be the right one. Perhaps you want to bring in a family member as a shareholder to mitigate inheritance tax. Perhaps a tax adviser has recommended adding a holding company. Perhaps you are restructuring to accommodate a new business partner.
Why Lenders Care About Your Company Structure
When a lender agrees to lend to a limited company, they do not just assess the property or the rental income. They assess the underlying owners of that company. Lenders want to know who controls the company they are lending to. That is a fundamental part of their risk assessment.
This means that changes to the ownership or directorship of your company are material events from the lender's perspective. Even though the company itself is a separate legal entity, the people behind it matter enormously to the lender.
The Most Common Structural Changes That Create Problems
Adding shareholders. You may want to give a spouse, business partner, or family member shares in the company. This is common for tax planning purposes. But if the new shareholder crosses the 20% ownership threshold, most lenders require them to be assessed as part of the lending arrangement. If they were not part of the original application, that creates a problem.
Adding directors. Adding a director, even without giving them shares, can affect the lender's assessment. Directors make decisions about the company. Lenders want to know who those people are.
Adding a holding company. Placing a holding company above your property company is becoming more popular as portfolios grow and inheritance tax planning becomes more sophisticated. But most lenders are not comfortable with multi-layer company structures. A simple SPV with individual shareholders is catered for widely. Add a holding company above it and the pool of willing lenders shrinks significantly.
"A lot of lenders are not particularly comfortable where there's more than one layer. As you start to add more layers, this becomes more complex in its structure."
Changing shareholdings. Adjusting the split between existing shareholders can also have implications. Moving someone from 15% to 25% ownership, for example, may bring them above the threshold at which lenders assess them. If they would not have met the lender's criteria, that creates a potential issue.
The Real Risk: Breach of Mortgage Conditions
Your mortgage offer documents contain conditions under which the lender agreed to lend. Most will include requirements about material changes to the borrower entity. Changing the company structure without informing the lender may put you in breach of those conditions.
"You could technically be in breach of your mortgage conditions. In those loan agreements will be conditions under which the lender is prepared to lend to you."
A lender who discovers a material change you did not notify them of can, in some circumstances, demand early repayment. That triggers early repayment charges on your existing mortgage and the need to refinance, potentially into a less favourable deal.
Some lenders monitor Companies House for changes to companies they lend to. This is more common than investors realise. Changes that you register at Companies House can trigger a review of your mortgage.
How to Handle This Correctly
The first step is to read your mortgage offer documents and understand what notification or consent requirements are in them. If you are planning structural changes, review those conditions before you act.
Contact your lender or broker before making any changes. Not after. A lender who is notified proactively and asked for consent is in a very different position to one who discovers a change that was not disclosed. Many lenders will accommodate changes, particularly if they make commercial sense, if they are handled through proper process.
If the change is significant enough that your existing lender cannot accommodate it, a refinance may be necessary. The question then is whether the benefit of the new structure outweighs the cost of the refinance, including any early repayment charges.
"Weigh up the cost benefit of any of these changes. In some scenarios, it's worth paying the early repayment charges because the benefit of the new structure is far stronger."
This is a calculation worth doing properly. A small early repayment charge to access a more tax-efficient structure that saves you thousands annually may well be worth it.
Get Advice Early
Tax advisers and accountants who recommend structural changes are not always aware of the mortgage implications. Finance brokers who handle the mortgage are not always involved in the tax planning conversation. The result is that investors sometimes implement changes that create finance problems without anyone flagging the issue until it is already a problem.
Make sure your accountant and your broker are talking to each other, or at least that you are coordinating the advice between them before you act.
Get in touch with us if you are planning changes to your limited company structure and want to understand the mortgage implications before you proceed.
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