Buy to Let Lenders Worry About Landlord Tax Planning

Landlords avoiding income tax by taking specialist advice could limit their buy-to-let mortgage options, one of the UK’s leading lenders has warned. 

Paragon regional sales manager Tim Sweetman revealed lenders are reluctant to agree on loans for landlords implementing ‘aggressive’ tax planning. 

One critical area that worries lenders is who holds the beneficial interest in a property formerly owned by a partnership before transfer into a limited company. 

Several buy-to-let tax specialists advocate forming a business partnership to buy rental homes before switching to corporate ownership.

Speaking at a forum, Sweetman told buy to let brokers there was a strong debate “about if this method could be considered contrived and fall foul of HM Revenue & Customs anti-avoidance legislation,” reported trade publication Mortgage Solutions. 

“Lenders are generally not in favour of this route and are unlikely to give approval. This may not be permitted in mortgage documentation. 

“There may be complications if refinancing a property that has been subject to these arrangements.”

Research by Paragon has revealed that only 10 out of 65 buy-to-let lenders would offer a mortgage to a borrower following a beneficial interest tax strategy.

“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,” said Sweetman. 

“If you do take those steps, and if there’s only 15% 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?”

Generally, tax follows beneficial ownership, so the person benefitting from a property's rent or sale proceeds pays income or capital gains tax. 

Transferring legal property ownership from a partnership or individual to a company may not negate beneficial ownership.