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 the landlord to move the economic value of the property into a company, whilst retaining the legal title of the property and thus the mortgage, in their personal name. Historically this was popular back when it was more unusual to hold properties within a Limited company and there were few Limited company products available from the lenders. By putting the property through a structure such as a Beneficial Interest Company Trust, it allowed the landlord to get a personal mortgage on the property but, from a tax perspective, still treat the property as if it was part of the company.
What’s happening at the moment?
Increasing numbers of landlords are running the rental income from personally held property, and related borrowing costs, through a Ltd Company to help minimise their tax liability. We are seeing a significant rise in Beneficial Interest Company Trusts being used as the structure to do this - in particular, to circumvent the restrictions on interest relief announced in 2015 and which are now starting to ‘bite’.
The impact on lending
Whilst this sounds great in theory, it is crucial that you understand how this impacts your ability to take a mortgage going forwards. We contacted 41 buy to let lenders to see how they felt about lending to someone who had a Beneficial Interest Company Trust in place, either to remortgage one of their existing properties or to buy a new one.
Of the 41 lenders we spoke to, just 4 said they can consider lending where this arrangement is in place. It was also quite apparent that they would be far more open to those borrowers who had this arrangement in place prior to the interest relief restrictions being announced i.e. the landlord has always run their business this way, rather than a change of structure to work around the tax changes.
Why are Lenders avoiding beneficial interest structures in property?
In terms of why lenders do not like lending where this arrangement is in place, it is mainly because there are concerns that this structure could be considered contrived, and thus fall foul of HMRC anti-avoidance legislation. (In a nutshell, they are worried it could be a tax avoidance scheme!) If this happens, the borrower may well find themselves with a large tax bill which they are unable to cover.
I suspect that lenders will only be willing to lend where there is a Beneficial Interest Company Trust arrangement once they are comfortable that HMRC are happy with this structure and there will be no recourse on the borrower. If you are considering entering into an arrangement such as a BICT, please do make sure you get proper advice from a qualified tax adviser, and also look at how this can impact your ability to raise mortgage finance. Our mortgage consultants would be able to help you with this.
I have an existing Beneficial Interest Company Trust and I need a re/mortgage… What do I do?
Firstly, don’t panic! If you have a historic Beneficial Trust in place, or something similar, there are lenders who will consider your application. I would strongly recommend speaking to a mortgage broker, such as myself, to help guide you through the application and put your case to the lenders to find the right product for your situation.
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 firstname.lastname@example.org
Updated May 2021.