Brokers may be missing out by not educating themselves on complex areas such as finance for properties owned through trusts, say experts.
Investec Banks business development manager Peter Izard said this niche area has been in the spotlight again, thanks to the publication of the ‘Paradise Papers’.
He says: “Brokers need to be more aware of this area, and understand the issues involved when arranging mortgage for properties held in trust.”
“There are perfectly bona fide reasons for using trust structures. But these can be highly bespoke arrangements. When arranging mortgage finances brokers also need to ensure that clients have received proper legal and financial advice.”
Most high street lenders will not provide mortgage funding for trust structures. But finance options are available from specialist lenders and private banks.
Lenders such as Investec, UBS, Butterfield and Coutts can provide this kind of financing. As well as longer-term mortgage deals they may also bridging and development loans options.
Izard says that in recent years demand for mortgage finance for properties held in trust has declined marginally.
“The cost of administering trusts has risen significantly and at the same time the tax benefits of holding property within a trust structure have periodically been reduced.”
Izard points out that many institutions are “quite rightly” taking the moral high ground, and don’t want to be involved in schemes that are involved in tax avoidance.
He says: “Clients are also being more responsible about the tax they pay.”
However he says this doesn’t mean that there aren’t legitimate reasons for using trust structures.
Izard says trust structures remain more integral part for those investing in offshore regions, such as the Channel Islands.
He adds: “This areas are highly regulated and highly transparent so it would be wrong to conflate the use of trust structures in this areas with tax avoidance.”
Enness Group, the high net worth mortgage broker, says the company has been involved in arranging finance for a number of investment properties owned in a trust structure.
Pricing remains relatively competitive. Enness director Chris Lloyd says rates are comparable to lending deals on non-trust properties. But he points out that most specialist lenders will only consider financing options of £500,000 plus.
Associated fees, particularly legal ones can be significantly higher on these loans, reflecting the increased administration and due diligence processes. Lloyd says that homeowners should expect costs to be around one to two percentage point higher, when compared to the cost of financing properties outside of a trust.
Mortgages for Business sales director Jeni Browne says many lenders will only be prepared to consider low LTV deals. She says: “It can be more difficult if you are looking for financing for more than 50 per cent LTV.”
Browne says that the main issue with this type of lending is determining who is liable for the debt. Trust structures will have a settlor (sometimes called the trustor or grantor) who puts the asset into trust.
There will also be trustees – who are responsible for administering and managing the assets – and one or more beneficiaries, who ultimately stand to benefit from these assets or investments. Settlors can be trustees and trustees can be beneficiaries.
One of the main issue for brokers arranging these finance deals is ensuring due diligence is completed on all relevant parties.
Lloyd explains: “This can make it quite a drawn-out process. Some lenders will want due diligence on trustees and beneficiaries, and may require additional personal guarantees.”
He draws comparison to properties that are owned through limited company structures. Again, lending rates and arrangement fees tend to be higher, so it’s important to weigh these additional costs against any perceived tax advantages.
There are a number of reasons why people might choose to own a property through a trust structure. If a property is left to minor it may be held in trust until they reach adulthood. Alternatively, if cash is left, trustees may decide that a property purchase would be a good investment for the beneficiaries.
Trusts have been used in the past to protect property assets from inheritance tax, but this is less commonplace now, thanks to higher and transferable IHT allowances. It has been reported that more recently parents have also used trust structures when buying property for children, to avoid the higher stamp duty surcharges.
Things can be more complicated when tax advisers use complex offshore company and trust structures to mitigate tax liabilities for wealthier clients.