Indirect Mortgages, where some of the named borrowers liable for mortgage repayments are not also named on the title deeds as owners of a property, are gradually increasing in popularity. They can afford young purchasers a means of getting financial assistance from parents without the parents needing to gift large lump sum deposits and they can when used carefully, allow couples and business partners a way to control their property portfolios without incurring the additional burden of effecting transfers of equity.
It is however, all too easy to perceive them as a vehicle for avoiding the higher rates of stamp duty for individuals purchasing second or subsequent properties and even when applied with the best of intentions, they can lead to the creation of beneficial interests in land when such trust-beneficiary arrangements were not intended. These mistakes are often not realised until the subsequent sale or remortgage of the property and can create big headaches for the property owners, the other borrowers and their respective solicitors and financial advisers.
Realising the root cause of most of these problems is key to avoiding them: That being ‘on the deeds’ of a property neither confers a financial stake in that property, nor guarantees that no stake exists. (see the article called Legal Ownership – what does it actually mean?)
Issues arise when beneficial interests in land aren’t properly defined at the right time because it is upon the beneficial shares that SDLT (Stamp Duty) is calculated and Capital Gains, Income Tax and even inheritance tax are worked out. HM Revenue & Customs start from the position that a beneficial interest in land is assumed to exist when money has been provided by a third party and, to bring us back to the headline of this article, when a share of a mortgage debt is assumed.
If your parents join you in an Indirect Mortgage and they own another property, they will trigger the additional 3% SDLT rate for second properties and rob you of your first time buyer SDLT relief. When an investment property is sold, those beneficiaries expectant on a payout will have to consider their capital gains position and should a beneficiary of a trust in land die, their share in the property, (which will need to be officially valued), will form part of their estate, but..
If the beneficial interests were not declared at the right time and in a manner that can be verified potentially many years later, then difficult questions may arise as to the shares owned, the intentions of the parties at the point the trust sprang into being and in the worst case, you may find yourself answering to HM Revenue & Customs, who take a very dim view of individuals attempting to use beneficial ownership as a way to avoid or evade taxes.
So to avoid getting into hot water when dealing with the very nuanced and complex legal world of equity in land, mortgage liability and increasingly your tax returns, ensure you get focused and reliable legal advice from an experienced solicitor before you put your plans into action. If you want to know more, our conveyancing and private client lawyers provide detailed fixed-fee legal advice drawing on decades of combined experience in the field.