Declarations of Trust – Is Lender Consent Required?

by Mark Alexander

15:41 PM, 14th September 2018
About a month ago

Declarations of Trust – Is Lender Consent Required?

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Declarations of Trust – Is Lender Consent Required?

This question has come up in every live webinar I’ve ever participated in. Also, I often see the question in Facebook groups, so the time has come for me to write an article on the subject which I can refer people to whenever the topic is raised.

Declarations of Trust have existed since the Christian Crusades and they are a legal tool used by every single conveyancing solicitor up and down the land. Rarely, if ever, will a solicitor recommend seeking consent from your mortgage lender. This is because solicitors know that a Declaration of Trust doesn’t compromise the mortgage lenders security.

There are also very good reasons not to seek consent. First and foremost, mortgage lenders don’t like granting it because they know nothing about the beneficiary. This would put them in all sorts of bother if they were to grant consent, not least of which might be money laundering regulations. Another reason this can cause a problem for mortgage lenders is that if they grant consent it may make it more difficult for them to repossess the property if you default on your mortgage. Therefore, if you request consent from your mortgage lender, expect them to decline or offer to remortgage in your joint names instead. For everybody’s sake, it is better not to ask, and that’s why solicitors take the stance described in my second paragraph above.

But so and so on Facebook said …

First, just because somebody said something on Facebook and somebody else agreed does not make it right. Facebook comments are full of tittle tattle, ignorance, uneducated opinion and in some cases some downright dirty tactics to secure business or besmirch a perceived rival. For example, mortgage brokers might well prefer you to remortgage and put the property into joint names, for reasons which should be self-evident to you, whether the broker admits it or not. I’ve read comments on Facebook posted by brokers suggesting the transfer of beneficial ownership is mortgage fraud. What a load of tosh that is! The worst it could ever be would is breach of contract, but only then if the mortgage T&C’s specifically prohibit the transfer of beneficial interest, which is extremely rare. Then you have cliques, where people support each others opinions on Facebook, making themselves out to be credible sources of information. In most cases they are not!

There are only two mortgage lenders I know of whose T&C’s specifically prohibit the transfer of beneficial interest for privately owned properties. They are CHL and Fleet mortgages.  Clauses prohibiting Limited Companies from transferring beneficial ownership are slightly more common in mortgage lending contracts (for example TMW have such a clause) but I cannot think of a single reason why a Limited Company would wish to transfer beneficial ownership anyway.

The bottom line is that unless your mortgage contract specifically prohibits the transfer of beneficial ownership then you can do it. Therefore, my advice is simple; ask an experienced, qualified, regulated and fully insured Barrister-At-Law to advise you on whether your mortgage lenders T&C’s prohibit the transfer of beneficial interest or not.

Unlike other professionals, Barristers cannot hide behind Limited Liability status if they are wrong. Essentially, when they give you advice they are personally guaranteeing you that they are right. If their advice turns out to be wrong you have recourse to them personally, with the support of their regulator.

You should also bear in mind that a Declaration of Trust alone might not be the optimal solution. Sometimes, your mortgage broker might be able to get you a better deal with a new joint mortgage. However, you will need to consider the costs of remortgaging in addition to the new mortgage payments. You will also need to consider the legal and tax implications of this.

If you do transfer a property into joint names, also bear in mind that Stamp Duty and CGT could be triggered. There is no CGT on transfers between spouses but there could be if you transfer legal and/or beneficial interest to anybody else, including a company. Similarly, Stamp Duty might also apply, even on transfers between spouses in some circumstances, so a tax consultation is always recommended, whichever option you choose.

Even if you do transfer legal ownership by remortgaging into joint names, a Declaration of Trust will usually be required to formally document the split of beneficial ownership between joint owners as ‘Tenants in Common’, especially if you want to split the tax consequences of ownership unequally.

A Declaration of Trust is not required if the property is mortgaged and registered as Joint Tenants, but income will then automatically taxed in equal shares between the joint owners. Where the intention is for legal ownership of property to be treated for tax purposes in unequal shares, a Declaration of Trust will be required and a Form 17 will need to be completed and submitted to HMRC to register the income split and the property ownership will need to be recorded by H Land registry as Tenants in Common.

In regards to how a Declaration of Trust is utilised as part and parcel of the BICT structure of incorporation, together with a Business sale agreement and a Clearing Agency Contract, you can link to Counsel’s briefing note to conveyancing solicitors and mortgage lenders in PDF format HERE.

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Comments

Richard Connell

22:34 PM, 17th September 2018
About 4 weeks ago

That's all very good but what happens when you come to remortgage one of your properties and you are asked to show bank statements of rent coming in but you can't as rent is going to your ltd co as you have a Declaration of Trust. Is mortgage company going to look favourably on that??

Mark Alexander

22:42 PM, 17th September 2018
About 4 weeks ago

Reply to the comment left by Richard Connell at 17/09/2018 - 22:34
It hasn’t been a problem so far. The new mortgage will be in the company name. Please see the link to Counsel’s briefing notes to mortgage lenders and conveyancers, which is part of the BICT suite of documentation provided by Counsel to all of his clients.

We have completed over 100 incorporations using the BICT structure to date and none of them have been challenged or rejected to lenders at the point of remortgage or by HMRC.

You will only get the wrong answers if you ask the wrong questions of the wrong people.

Counsel has included an email address on his briefing notes if you have any further questions.

J C

15:30 PM, 20th September 2018
About 4 weeks ago

Reply to the comment left by Mark Alexander at 17/09/2018 - 22:42
Does this mean, the Declaration of Trust states 100% beneficiary to the company and 0% to the borrower? And this is legal?

Mark Alexander

16:28 PM, 20th September 2018
About 4 weeks ago

Reply to the comment left by J C at 20/09/2018 - 15:30
No it doesn’t mean that and yes of course it is legal. The law is one of the oldest on the statute books and dates back to the Christian Crusades. It would not be recommended by solicitors and barristers otherwise

Bill Morgan

2:00 AM, 21st September 2018
About 4 weeks ago

Reply to the comment left by Mark Alexander at 20/09/2018 - 16:28
Hi Mark,

When it comes to refinance into the limited company do you have to do it in one go or can you do it as and when there are no redemption penalties which may not happen all at the same time especially if you have different lenders?

Mark Alexander

7:43 AM, 21st September 2018
About 4 weeks ago

Reply to the comment left by Bill Morgan at 21/09/2018 - 02:00
You can refinance whenever it is economically viable for you, one property at a time or all in one go, whichever suits you best. Same for selling them.

shpet

20:02 PM, 25th September 2018
About 3 weeks ago

Hi Mark,
By transferring all beneficial interest to spouse from single owner, when remortgaging does it mean that only the beneficiary can do so as there is no proof for original owner to remortgage it anymore?
Can rents and expenses continue to be payed on original owners account and just profits transferred to beneficiary or is just rental potential will be looked at by lender when remortgaging?
Many thanks

Mark Alexander

21:12 PM, 25th September 2018
About 3 weeks ago

Reply to the comment left by shpet at 25/09/2018 - 20:02
I have never come across a scenario where 100% of beneficial interest has been transferred to a spouse. However, assuming it is theoretically possible, upon remortgaging the new mortgage application would need to be in the spouses name.

Far more common is for a property to be legally owned by one person who transfers a proportion of beneficial ownership to a spouse or another person. In this scenario, any remortgage application would be name in the names of the joint owners and the legal ownership of the property would need to be conveyed into the names of the joint owners on completion of the remortgage.

In regards to the second part of your question, HMRC has Transfer of Income Streams Rules to "look through" transfers of income streams where there is no transfer of the underlying asset. In such a scenario HMRC are entitled to tax the legal owner.

I have to say that both scenario's you have outlined are extremely strange. What is it that you are looking to achieve?

shpet

0:38 AM, 26th September 2018
About 3 weeks ago

Reply to the comment left by Mark Alexander at 25/09/2018 - 21:12
Sorry if I wasn't clear I meant a property legally owned by me (higher tax payer) transferring 90% or all (if advisable) of beneficial ownership to spouse (basic tax payer) by declaration of trust.
Or if possible two chunks of 42% in different years so not invoke SDLT in my case.
Was not sure when it comes to remortgaging how it will work and can we/she continue with same bank account I have to receive rents etc or it should be a joint one?

Mark Alexander

13:42 PM, 26th September 2018
About 3 weeks ago

Reply to the comment left by shpet at 26/09/2018 - 00:38
I would suggest 42% is probably the optimal figure in that case. There is a risk that transferring a further 42% the following tax year would be treated as a 'connected transaction'.

If there are a number of properties then a family partnership may be more suitable because partnerships can allocate profit shares disproportionately to ownership.

Please book a consultation so that I can make recommendations formally, after being armed with all the facts.

https://www.property118.com/book-a-consultation/

In regards to future remortgaging, this would need to be in joint names whichever way you decide to restructure.


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