Popular buy-to-let tax loophole 'won't work', accountants warn
10-30-2016
The arrangement has gained in popularity since the failure of a judicial review into tax changes, led by Cherie Blair Credit: David Parry
Olivia Rudgard
controversial tax manoeuvre allowing landlords to transfer buy-to-let properties into a limited company without having to remortgage, has received a flood of inquiries.
Promoters of the "beneficial interest company trust" are capitalising on a trend among landlords to move existing properties into company structures.
This allows them to avoid the higher buy-to-let tax being introduced next April, which at the moment relates only to properties directly owned by individuals.
Interest in the service has leapt since the failure of an attempted judicial review which sought to overturn the tax.
Around 40 landlords have already used the loophole, promoted by law firm Cotswold Barristers. It says another 50 have inquired since the attempted judicial review, which was led by Cherie Booth QC, failed earlier this month.
But experts warn that landlords could fall foul of tax avoidance laws as well as leaving themselves open to allegations of "mortgage fraud".
How does it work?
Many existing landlords are deterred from "incorporating" their properties because of the costs associated with moving them into a company.
One of these is the need to remortgage, which incurs administrative costs and may mean a borrower loses an extremely favourable low tracker rate.
Landlords who own their properties themselves will have mortgages in their own name. If they move them to a company, they would have to take out a new mortgage via the company.
This may mean losing a favourable rate and moving onto a more expensive one.
The "beneneficial interest company trust" claims to allow borrowers to move their properties into a company while retaining the legal title - removing the need to remortgage.
Borrowers transfer solely the beneficial interest into the company, and keep the mortgage in their own names.
Meanwhile, income from the properties goes into the company and is taxed at the corporation tax rate, which is currently 20pc and falling, regardless of the tax band of the individual landlord.
The landlord would still potentially have to pay stamp duty and capital gains tax on incorporation, unless they are exempt. (An exemption from having to pay stamp duty exists for partnerships, and capital gains tax does not have to be paid by landlords who can show that they operate as a business.)
When the new tax regime starts to be phased in from next April, the incorporated landlord continues to pay tax on the income at corporation tax rates and is exempt from the new law.
Mark Smith, of Cotswold Barristers, who promotes the service, said: "We are suggesting that this arrangement does not affect the lender’s security because you’re not changing the legal interest.
"If the lender needed to enforce the loan, it would overreach any trust status, and the lender would still have to come after the individual."
He said that because of the tax implications it is only a suitable option for landlords with at least £1m of properties, each with mortgages worth 60 to 65pc of the property.
Cotswold charges fees of up to £14,000 depending on the size of the portfolio.
What are the problems?
Buy-to-let tax changes - Mortgage interest relief
- From 2020, landlords will no longer be able to dedu
Nimesh Shah, of accountant Blick Rothenberg, warned of "huge pitfalls".
He said the main issue from a tax perspective is a section of the Income Tax Act which prevents individuals from transferring an income stream into a company for tax reasons.
Mr Shah said HMRC would be looking for any sign that this was an artificial structure or tax-motivated manoeuvre.
He said: "The test is to do with why you're incorporating. Is there a commercial rationale, or is it a tax reason?
"In a normal incorporation situation everything is going in to the company. Here you're splitting the income and the ownership out, which makes it more of an issue," he said.
Mr Smith said it would not be seen as tax avoidance, because it conferred no extra benefit above those offered by any corporate structure.
On a separate issue, Mr Shah also said that property owners need to be careful with the section of the stamp duty law which apparently allows a partnership to avoid stamp duty on incorporation.
There is no set test, but the Revenue can remove the relief if it believes that the partnership has been established specifically for the purposes of avoiding the stamp duty charge.
Mortgage danger
Lawyers also warned that failing to tell your lender of a change in ownership of a property could leave you open to problems, which in the worst cases could lead to a loan being called in.
Jeremy Raj, of law firm Wedlake Bell, said: "If you're not careful you are leaving yourself open to being accused of committing mortgage fraud. If there's any major change in the ownership of a company then the lender is entitled to know."
Mr Smith said that his lawyers check the terms and conditions of any potential client's loans carefully to make sure they will not be breaking the terms of their mortgage.
The UK's two largest buy-to-let lenders, Lloyds and Nationwide, both declined to outline their position relating to the arrangement.
How are you coping with the buy-to-let tax changes? Let us know: olivia.rudgard@telegraph.co.uk