If you have decided you want to use the equity in your home to buy a commercial property, or perhaps you have an inheritance you want to use for that purpose. In either case you will want to choose a legal structure that is the best fit for your personal circumstances.
One question you may ask yourself is whether it will be a good idea to use a Trust to purchase a commercial property. The pros and cons and the various options available to you are discussed below.
You may consider that a number of factors are important:
- You will want to protect your family home.
- You will want the ownership structure you choose to purchase the commercial property to be tax effective, and if possible reduce your own personal tax liability as much as possible.
- You may want some flexibility in case your circumstances change.
Option 1: You establish a separate trust to purchase the commercial property
A Trust is likely to be one of several suitable methods of ownership if a Trust is formed to specifically only own investment properties. We recommend that if possible you should try to keep your investment properties in a stand-alone structure, separate from the ownership of your family home.
In this way your family home will be kept separate from the activities of the commercial investment, and the risks which inevitably come with it e.g. issues with the commercial property's tenants or liability for payment of the commercial property's mortgage.
It may then be prudent to keep the family home in a separate family trust which protects the home from personal creditors. This may be particularly if you are involved in any other business as an owner.
Borrowing and Security
If you need to borrow money to fund the purchase of the commercial property (as realistically most people do!) it will be very important to protect your family home. You should attempt to persuade the bank if you can that it is not necessary to include your family home (irrespective of how it is owned) as part of the Bank security. If this is not possible, then we recommend that you negotiate that your home forms only a "limited" part of the bank's security. Whether the Bank will agree to leave your house free of any charges will depend on how much you are borrowing and your ability to service the loan
Option 2: Using a combination of trust and company structures
The investment property could be purchased in a company for which you (and perhaps other members of your family) are shareholders. Either from the beginning or in future years (depending on your accountant's advice), shares can be transferred to your family trust and that Trust may also own your family home.
Borrowing and Security
Your new company could then borrow the funds needed to purchase the commercial property, with the company offering a mortgage security over the property.
If the bank requires more security, then the bank may insist that the family home forms part of the bank's security. If the family home is owned by a trust then the trustees and you personally will likely be asked for guarantees in favour of the Bank. When the loan amount reduces you can ask the bank to release the family home from their security.
Conclusion
Even before you have found a commercial property to buy, it is best to discuss the structuring options with your professional advisers.
If you discuss the possible ownership discussions early then this will hopefully allow you more time to enter into productive negotiations with your bank as to what security they will settle for. If you go into a property purchase with an idea as to what ownership structure you will use then this can also have the benefit of reducing some of the time pressures on you that will inevitably pop up during the purchase process e.g. you will be able to dedicate more time to carrying out your due diligence investigations on the commercial property you have under contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
