Brokers have been warned that landlord clients who follow aggressive tax planning strategies such as using beneficial interest could be limited in their potential mortgage options.
The lender also urged brokers to understand more about beneficial interest terms which were “causing a lot of debate” within the market at present.
Beneficial interest works in the transition of properties between a partnership agreement and incorporation into a limited company.
The client retains the legal title and mortgage in personal name and relies on the principle that taxation follows beneficial ownership, not legal title.
Speaking at Mortgage Solutions’ Buy to Let Forum, Paragon regional sales manager Tim Sweetman (pictured) highlighted that moving properties into a limited company was not always the right move.
And he told the audience in Manchester that beneficial interest “will get looked at more closely going forward.”
Fall foul of anti-avoidance
Paragon warned that there was a strong debate “about whether this method could be considered contrived and fall foul of HMRC anti-avoidance legislation”.
“Lenders are generally not in favour of this route and are unlikely to give approval. This may not be permitted in mortgage documentation,” it noted.
And it added that there may be “complications if refinancing a property that has been subject to these arrangements”.
What options for clients?
A survey of 65 buy-to-let lenders by broker firm Vincent Burch for Paragon earlier this year found that only 15 per cent would complete a beneficial interest mortgage.
Sweetman continued: “We’re not saying there’s anything wrong with it in principle, but what we are saying is make sure you take that relevant advice before going down those steps.”
“If you do take those steps, and if there’s only 15 per cent of lenders who will actually carry out beneficial interest lending, what options are there for the client and what are the actual costs that could be incurred by the client moving down the line?” he added.
When it goes wrong
One broker attending the event said to Sweetman that he was getting lots of enquiries on beneficial interest and always directed clients to the lender.
“We’re very aware of what the lenders want and don’t like,” he said.
“Paragon and lots of other lenders say they won’t do it.
“The last thing we want to do is one, give tax advice, and two, when it all goes wrong in a few years’ time, for them to come after us as well,” he added.