Holding buy-to-let property in trust

A trust is the name given to an arrangement where one party holds an asset for the benefit of another. Find out about holding buy-to-let property in a trust.

Trusts are very difficult to finance with a mortgage lender some investors may consider a Special Purchase Vehicle and a Limited Company Mortgage as an alternative.

There are many reasons to use a trust

Assets such as bonds, stocks and shares, property and life insurance policies can all be held in a trust. There are three parties involved in a trust:

  • the settlor (sometimes called a trustor, grantor or donor), who puts an asset into a trust;
  • at least one trustee, who has control over the asset; and
  • a beneficiary, who receives the benefit of the asset
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Settlors can be trustees, and trustees can be beneficiaries. The benefit from the asset can be capital, income, or both.

People settle assets into trusts for many reasons. They might wish to protect an inheritance or govern the affairs of a young or incapacitated person. The benefit might depend on certain conditions that the settlor specifies, and the settlor may themselves benefit from the trust.

Buy-to-let lenders are often unwilling to lend to trusts. This is because, as with companies and partnerships, there is less personal liability.

Why would you put buy-to-let property in a trust?

Any property, whether a personal residence or a buy-to-let property, can be put in a trust.

Like individuals, non-charitable trusts pay capital gains tax (CGT), income tax and inheritance tax. This liability falls on the trustee in most cases. But how HMRC calculates and imposes tax depends on the status and terms of the trust.

For instance, In the case of a ‘bare trust’, HMRC ignores trustees for CGT purposes and treats disposals as though the beneficiary made them. Thus, a transfer from the trustee to the beneficiary does not give rise to a CGT liability.

For the same reason, properties bought through a trust are treated as though the beneficiary were the buyer. If the beneficiary is not already a property owner, the buyer will not pay the higher rates of stamp duty.

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Most trust arrangements are now tax-neutral

In the past, property owners made wide use of trusts to mitigate their tax exposure. Tax policy has changed in recent years, though, and many loopholes are now closed.

The Finance Act 2015, for instance, stopped property owners from using multiple trust structures to avoid inheritance tax. Trustees also pay the higher rate of CGT, and most have a lower annual exempt amount than individuals.

So for the most part, all but the most complex trust arrangements are tax-neutral. Where a settlor can save on inheritance tax, for example, they might have to pay more income tax. Or they might need to pay more inheritance tax to save on capital gains tax. And there are the varying costs to set up and run a trust to consider.

Rather than using trusts just to avoid taxes, investors should consider the other uses of different kinds of trust, and how they might align with their investment goals.

It may be difficult to finance a buy-to-let property owned in a trust

Trusts are independent legal entities, and transfers into a trust counts as arm’s-length transactions. In effect, the trust is buying the property from the settlor.

From a lender’s perspective, there is little difference between a trust buying a property, and a settlor placing a property in a trust. The trust is the owner in either case, and if a mortgage is involved, the trust is also the mortgage holder.

This can make things difficult. Buy-to-let lenders are often unwilling to lend to trusts. This is because, as with companies and partnerships, there is less personal liability.

For the most part, only commercial and specialist firms will agree to finance a buy-to-let property held in trust. The scarcity of funding options means that competition is less, and thus rates and fees tend to be higher than for private individuals.

Different legalities and responsibilities apply to different types of trust

When the settlor settles an asset, it ceases to be their property. It will no longer benefit them unless they have created a 'settlor-interested trust'. The settlor may create a trust while they are alive through the use of a trust deed, or they may include a trust as part of their will.

The will or trust deed will outline how the settlor wishes the trust to hold and manage their assets. The trustee or trustees are responsible for carrying out these wishes. In most cases, they will be responsible for notifying and paying tax on the asset. If asked, they must give the beneficiary (and any interested settlor) an income and tax statement.

For some types of trust, the beneficiary may be responsible for declaring and paying tax.

There can still be benefits to holding a buy-to-let property in a trust

Many investors buy property to leave a financial legacy for their families. An individual might wish to gift a buy-to-let property to their child, and use a trust to manage the asset until the beneficiary comes of age.

People also set up trusts to protect their assets in their old age. Some do so to exclude their properties from means testing for care costs, a process called ‘deprivation of assets’. But councils might still take the assets into account. And even if the individual defers their care payments, the council may still sell their property after their death.

Some trusts exist to manage the financial affairs of a vulnerable person, who might find it difficult to do so themselves.

Trust arrangements are many and complex, and trusts can serve many different functions. Whether a trust is a suitable arrangement depends on your circumstances and goals. HMRC can tell you how to set up a trust, but be sure to consult a tax or financial planner or trust advisor for more in-depth guidance.

This information should not be interpreted as financial advice. Buy to let mortgage rates are subject to change. Speak to our advisors for a mortgage illustration. Seek tax advice from a professional.