Since the Section 24 income tax relief changes began in 2017, more 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 (BICT) 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. Putting the property through a structure such as a Beneficial Interest Company Trust allows 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, 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. Historically, I could count on one hand the number of lenders that would consider lending where a BICT was in place; at one point, none of them would. However, it appears that attitudes are slowly changing.
Having spoken to several buy to let lenders recently, a few more will now at least consider applications where a BICT is in place. Whether or not the lender accepts the application will depend on whether the legal paperwork relating to the Beneficial Interest Company Trust satisfies the underwriters. Still, this marks a considerable change in attitude compared to just two years ago.
What will put lenders off is if you’ve held a personal name buy to let mortgage with them but set up a BICT during the mortgage term without telling them and now want to remortgage. Typically, this is considered a breach of your mortgage agreement, so lenders won’t want you on their books anymore. However, if you use a purchase or remortgage as an opportunity to put a BICT in place and all the paperwork checks out, you’re more likely to secure the finance you need.
Currently, it’s only specialist buy to let mortgage lenders willing to consider these applications, meaning interest rates will likely be higher. This isn’t necessarily a deal breaker, but something to be aware of.
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 cannot cover.
I suspect that more 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 ensure you get proper advice from a qualified tax adviser. Also, look at how this can impact your ability to raise mortgage finance. Our mortgage consultants would be able to help you with this. As the cost difference between personal name and limited company mortgage rates continues to decrease, this arrangement might not be as cost-efficient as before.
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 that will consider your application. I would strongly recommend speaking to a mortgage broker, such as Mortgages for Business, 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 us a call on 0345 345 6788 or submit an enquiry.
