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Can bridging loans save personal tax on cash withdrawals?

There are many reasons for taking out a bridging loan, but one of the lesser known uses is to allow someone to withdraw capital from their property company without paying tax.

An example of how this works is a couple who formed a limited company to own their buy-to-rent property business. A lender provided a bridging loan to the couple for £1.7 million. The couple then lent the money as a director’s loan to the limited company. The limited company repaid the loan quickly to avoid paying a lot of interest.

On the company accounts, the directors are owed £1.7 million, but property sales and retained property will enable the company to repay the couple the £1.7 million loan. This capital withdrawal is not subject to personal tax. If the property had remained in personal ownership and capital withdrawn, the couple would have paid Capital Gains Tax.

When a limited company sells property, corporation tax is due, but this should be less than Capital Gains Tax.

HMRC accepts this arrangement and has details of capital withdrawal regulations in its Business Income Tax Manual. Borrowers who want to take out a similar bridging loan should first consult a tax advisor as there are terms and conditions that must be met for this arrangement to be accepted by HMRC. Also, not all buy-to-rent businesses are suitable for converting into a limited company. A bridging broker will find the best suited lender and bridging loan deal for you.