Part of a series looking at various niche markets within the buy-to-let sector where choice of lender is more restricted than for normal borrowers. One such area involves loans secured on residential properties owned through trusts.
Properties can be held in trust for many reasons. For example, if a property is left to minors in a will it will normally be held in trust until they are adults. Even if cash is left, trustees may decide it is a good investment for beneficiaries to purchase a buy-to-let property and use a mortgage to gear up the investment. In recent years reversionary trusts have also been used in an attempt to protect property assets from Inheritance Tax. And things get even more complex when tax advisers start to use complicated offshore companies and trusts which can have several levels of ownership in an attempt to mitigate tax liabilities for their more wealthy clients.
Using these structures is fine where no borrowing is required against the properties, but what’s the market like if you need to raise funds within a trust against a property?
The first thing to make sure is that the trust has the power to borrow money. This is not always the case and the subject will normally be covered in the trust deed.
Most traditional buy-to-let lenders will not lend to trusts as there is no personal liability involved. A few buy-to-let lenders consider loans to UK and offshore trusts and their terms are competitive with low interest rates and interest-only loans. But the schemes are often restrictive, with most cases unable to fit criteria.
So, where do you find finance for properties owned through trusts? For loans of over 250,000, specialist commercial investment lenders will often provide competitive terms and good interest-only periods. As well as residential buy-to-lets these lenders can also help fund commercial investment property, an increasingly popular sector.
But for smaller loans the choice is restricted to high street banks which will normally require rental cover on a capital and interest basis. This cuts the amount available to clients. Rates are also usually significantly higher than on normal buy to let loans – around 6.5%.
For advisers, it is something of a balancing act between the benefits of holding a property within a trust and the potential disadvantages of reduced borrowing and increased higher rates where a deal does not fit with a specialist buy-to-let lender. Much will depend on the motives for placing the property in a trust.
Decisions must be made on a case by case basis but advisers should make sure the costs do not negate the benefits of placing property in a trust when advising their clients.