Since the Section 24 income tax relief changes began in 2017, an increasing number of landlords have started running rental income via Beneficial Interest Company Trusts. While not a new structure, what are they, why are landlords using them, and why should you be cautious?
What is a Beneficial Interest Company Trust?
A Beneficial Interest Company Trust allows landlords to move the economic value of the property into a company whilst retaining the legal title of the property, and the mortgage, in their personal name.
Historically, this was popular when holding property in a limited company was unusual, and very few limited company buy to let mortgage products were available. By putting the property through a structure such as a Beneficial Interest Company Trust, landlords can still access personal buy to let mortgages, but from a tax perspective, treat the property as if it was part of the company.
Since the Section 24 changes kicked in, landlords have been looking for ways to minimise their tax liability. While many opted to own property in a limited company structure fully, some landlords are using the Beneficial Interest Company Trust structure to circumvent the restrictions on interest relief.
Will buy to let lenders accept applications where Beneficial Interest Limited Trust structures are in place?
Whilst this property investment structure sounds excellent in theory; there’s a reason not everyone is doing it. I can count on one hand the number of lenders that would consider lending where a Beneficial Interest Company Trust arrangement is in place. Even then, the consensus from this minority of lenders is that your application stands a better chance of consideration if you’ve used this arrangement before the interest relief restrictions announcement. In their view, landlords who’ve adopted this structure after the Section 24 announcement did so to work around the tax changes.
Why do buy to let mortgage lenders avoid Beneficial Interest Limited Trust structures?
In terms of why lenders do not like lending where this arrangement is in place, it is predominently because there are concerns that this structure could be considered contrived and fall foul of HMRC anti-avoidance legislation. In a nutshell, they are worried it could be a tax avoidance scheme!
If HMRC pursues a case against you, you may well find yourself with a large (and unplanned) tax bill. Lenders are therefore concerned that landlords may find themselves unable to cover this bill. While HMRC has not fully pursued a high number of cases, buy to let mortgage lenders still consider this structure a high risk.
Besides the potential issues with HMRC, the legal complexities that lenders (and borrowers) can run into with these structures mean that lenders are mostly reluctant to take the risk. We’ve encountered situations where landlords have set up a Beneficial Interest Company Trust during the course of an existing personal buy to let mortgage, without telling their lender. This can be a violation of your mortgage terms, which while you might not be found out immediately, will cause issues when you come to remortgage. Ill-intentioned or not, lenders don’t take kindly to this type of action and may consider you untrustworthy, and consequently reject your application (and potentially any future ones).
This type of structure can also make chasing mortgage defaults more difficult; while the person named on the mortgage and property deeds are underwritten (and therefore responsible), if the rent is going into a limited company, the waters are muddied. With so many potential issues surrounding the structure, the majority of buy to let lenders consider it too much hassle and too high risk to consider supporting.
You must seek professional tax advice before making any decisions about property investment structures. You should also consider how specific structures impact your ability to raise a mortgage. Our mortgage consultants will be able to answer any questions you have about the latter.
I have an existing Beneficial Interest Company Trust; what do I do?
Firstly, don’t panic! As I’ve said above, if you have a historic Beneficial Interest Limited Trust in place, or something similar, some lenders will consider your application. I would recommend you speak to a broker to help you find an appropriate lender and guide you through the application process.
If you would like to discuss getting a mortgage through a beneficial trust or other complicated company ownership structure, please give me a call on 01732 471647 or email me directly on email@example.com
Updated May 2021.