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Clause 24: Why can’t I just transfer my personally-held properties (with personal mortgages) into a limited company?

First Published: March 2016 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

With the new Mortgage Interest Relief Restrictions (MIRR) starting from tax year 2018 (also known as ‘Clause 24’), many portfolio landlords will be seriously negatively affected, and the above question is the ‘elephant in the room’ – this article explains the risks involved in transferring properties into a company while maintaining underlying personal mortgages on the properties transferred.

How beneficial to me would this be?

Clearly, the ‘Holy Grail’ for portfolio landlords is to be able to transfer their portfolio to a company, without needing to re-finance their personal mortgages, which may be on attractive Base Rate trackers and on high LTVs. For many portfolio landlords, the tax position is often not an issue, since the landlord would qualify for Incorporation Relief meaning that no CGT is payable on incorporation.

Therefore, in my experience since July 2015, many landlords have wanted to properly understand why they can’t simply transfer their portfolio to a company and retain their personal mortgages, since alternative options are often expensive and not hassle-free to implement.

Why can’t I just transfer my personally-held properties (with personal mortgages) into my limited company?

The reason that most, if not all, landlords with personal mortgages on their rental properties can’t simply transfer the properties to a company is that this would be a serious and permanent breach of their mortgage lender’s terms and conditions.

Most, if not all, lenders have a general clause in the mortgage terms and conditions that prohibit the property being transferred to a third party, and this would include a company, even if the company is owned by the property owner.

Obviously, a property with a first-charge against it by a mortgage lender can’t be legally transacted over to a company without the mortgage being repaid. However, the transfer for beneficial purposes (which is what drives the accounts and tax position), can be effected via a deed of trust, which then moves the beneficial interest in the property from the individual to the company. Of course, this would only ever be possible by deliberate concealment of the transfer from the lender.

But, how would the lender know if I had transferred my personal-owned-and-mortgaged property to my company?

This is a fair question, and it is entirely possible that a person may go the entire length of their personal mortgage with the beneficial interest in a property having been transferred to a company, without the lender’s knowledge. When the mortgage contract ends, the mortgage is simply repaid.

However, this is clearly against the terms and conditions of the mortgage lender, and any landlord who doubts this can simply write to their lender to clarify the lender’s view. It is highly unlikely that any BTL lender would agree to the transfer.

Some mortgage lenders – such as Mortgage Express – are actively trying to reduce their loan book, and are looking for any reason to cite a mortgage breach as a reason to call in the mortgage. Other lenders with large loan books stuck on unprofitable (for them) Base-Rate trackers would be keen to learn of borrowers who had breached their mortgage terms and conditions, since the lender would then have a reason to call in the loan.

All it would take is a confirmation letter from the lender to the borrower, requesting written confirmation and sign-off that the beneficial owner of the property is still the individual and not a company, and the landlord would be in a difficult position. In my experience, most landlords do not want to deliberately lie in writing to a mortgage lender, as they recognise this could be a criminal offence.

Also, the borrower would have to account for the transfer of the properties to the company on their personal tax return – which would of course show the capital gains position, plus an SDLT1 Tax Return would need to be filed with HMRC. These would be irrefutable proof for a lender that the borrower had deliberately transferred the property to a company, and it wouldn’t be possible for a borrower to conceal this.

Or, on future mortgage applications, lenders may check the rents declared on personal tax returns to the borrower’s credit report (which discloses the personal mortgages they hold), and which could easily show up any serious discrepancies.

Or, simply by checking Companies House, lenders could review the accounts for any company their borrower is involved with, and the balance sheet in the abbreviated accounts on the Companies House public record would show any new properties acquired by the company.

In short, landlords who choose to transfer the beneficial interest in a personally-mortgaged property to a company are relying on the lender’s currently passive nature – post Clause 24, with lenders being fully-aware of the benefit of a company transfer, and looking for a reason to call in unprofitable mortgages, it is entirely possible that lenders may wish to commence checks on their borrowers, and it that scenario it would be quite difficult to conceal the beneficial property transfer.

Beware – LPA receivers …

BTL mortgages are not regulated by the FCA (Financial Conduct Authority), and so are treated as business loans, not subject to consumer legislation.

If a lender suspects a landlord has deliberately and seriously breached their mortgage terms of conditions, such as via the beneficial transfer of a personally-mortgaged property to a company, they may then appoint an ‘LPA receiver’.

The Law of Property Act (LPA) 1925 sets out the rights of a lender in respect of property charged as security on a loan. Appointing an ‘LPA receiver’ is an option for a lender where a borrower has breached the terms of their mortgage.

What can an LPA receiver do?

An LPA receiver has serious powers to take over a property, as follows:

  • Collect rent from the tenant directly, and pass rent directly to the lender
  • Change the locks on a property, insure a property, order repairs on a property
  • Remove any occupier without a valid tenancy, from the property
  • Sell the property and use the proceeds to repay the mortgage (though this is rare)

Obviously, the above powers are severe, and all the LPA receiver’s fees and charges are payable by the borrower. Essentially, on the appointment of an LPA receiver, the landlord loses control of the property, since the tenant will of course then be very reluctant to pay anything to the landlord. As the LPA receiver can order locks to be changes, and repairs to be made, often the landlord is completely ‘out of the loop’, and of course now receives no income from the property

This is an example of the old legal adage that ‘possession is nine-tenths of the law’ i.e. effectively the receiver now ‘possesses’ the property, and so the onus is on the borrower to contact the lender to have the LPA receivers removed. And, note that the lender does NOT need a court order to appoint an LPA receiver.

Summary…

The Holy Grail for portfolio landlords following Clause 24 is to be able to transfer their personally-mortgaged properties to a company without needing to re-finance, and claim incorporation relief on the transfer to avoid CGT.

However, lenders would almost certainly not agree to this, and so a landlord would have to knowingly and deliberately conceal the transfer, which would be a serious matter. In the worst case scenario, the lender only needs to suspect a mortgage breach to be able to appoint an LPA receiver to control the property, collect the rent, and sell the property – all without needing a court order. Therefore, it could be argued that landlords who choose to breach their mortgage terms by transferring personally-mortgaged property to a company are taking a ‘low likelihood / high impact approach – i.e. although the likelihood of detection by a lender may be low, the impact of detection could be severe.

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