Property and UK Tax Part 6
Occasionally I meet property investors who are very earnest and who tell me that their main priority is to leave a legacy for their children. What they would really like to do is to set up their businesses in such a way that they could have what would effectively be a trust fund. This trust fund would then pass the properties and the income generated from the properties over to the children – preferably tax free, or at least as tax efficiently as possible.
In theory, this sounds great – but in practise, is this really possible or even wise from a business point of view?
Now, this is not my specialism and my knowledge of this subject is rather limited. But one question I would ask these investors (and this is regardless of the stage in which they find themselves at in their property journeys) is: “If you do something like this, how easy would it be for you going forward to be able to borrow money (if needed) to keep expanding your property business?
In my opinion, one of the potential problems with having a trust fund is that there might not be too many lenders who would be keen on lending to this type of entity. I imagine that there aren’t many at all in fact, purely because this is something that would be out of their comfort zone.
The main priority for any lender is to work out how easy it’s going to be to repossess and to sell the asset if the payments on the mortgage stop – and, if it’s all entwined in a trust fund, I imagine this wouldn’t be easy at all. As such, I imagine that most lenders would keep away from this.
There probably are ways to do this and if you’re an accountant or a solicitor please feel free to contribute your comments at the bottom of this blog post. It might be that you could set up your property business as a limited company and could then hold the shares of the limited company within a trust fund. Would the lender accept this?
In all honesty, I don’t know, but to me this seems like an easier and cleaner way of organising your business and it might just keep the banks on board. Either way, I would be extremely careful about this because regardless of how you structure your property business, you need to be doing it with borrowing in mind.
If you’re going to invest in property seriously – and if you’re going to be investing in the future, i.e. not as a one-off but to build a portfolio – then you need to make sure that you can get access to the right funds going forward.
With this in mind you need to have your entity or entities (you might have more than one depending on your strategy) set up correctly not just from a tax point of view, but perhaps more importantly, from a finance point of view. Remember, if you are to invest in property seriously, then you will probably need to borrow funds to keep your business going and your portfolio growing.
So, if you’re considering setting up a trust fund for your property investments, it really is wise to speak to an accountant as well as a solicitor who specialises in trust law. They will be able to advise how you can do this and also how it can be done so that your lending is not curtailed.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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