Spiralling finance costs in turbulent times?

Spiralling finance costs in turbulent times?

10:44 AM, 20th May 2022, About 3 months ago 11

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I’m looking to remortgage and fix for 5 years but I’ve found that 4 of my properties are being classed as commercial which is dictating higher interest rates and ‘setup fees’.

The four freehold properties each contain two self-contained flats and lenders are treating them as ‘Multi-Unit Blocks’ which is commercial lending. If I create leases for each of the flats then the lenders are happy to lend on standard residential terms which means the interest and setup fees are less (to the tune of 4k to 5k over the 5 years).

I’ve spoken to a solicitor who thinks that the following sequence would have to take place (at the same time) in order for the new mortgages to be secured on the new leases;
1. Freehold title transferred into company
2. Company issues leases in my name or my wife’s name or both
3. New lending secured on new leases
4. Old lending paid off
They thinks that because the freehold isn’t worth anything and the new leases are in our names (as is the original freehold title) then no Stamp Duty or Capital Gains would be due.

Can I get an opinion on this as it might be a massive spanner in the whole process of trying to keep our costs (and rents) down whilst in these turbulent times?

Ian



Comments

CMS View Profile

11:56 AM, 20th May 2022, About 3 months ago

The issue you have is that the freehold is only worth a nominal amount once the long leases are granted which presumably will not be until after the company has taken the freehold in which case SDLT may be payable.

The alternative way of doing this is as follows:

1. Assuming that Husband (H)and Wife (W) own the freehold now;
2. H&W grant a lease to W of one flat;
3. H&W grant a lease to W of second flat;
4. H&W grant a lease to H of third flat;
5. H&W grant a lease to H of fourth flat.

SDLT is payable on the transfer of beneficial interests so at the same time as completing the leases you should enter into deeds of trust stating that the properties are held in the same proportions as before the leases were granted.

Then the freehold is subject to the leases and will be worth a nominal amount so can be trasefrred to a company.

Hope this helps but if you want to talk about this send me your email please. Charles

CMS View Profile

12:19 PM, 20th May 2022, About 3 months ago

Reply to the comment left by charles stevens at 20/05/2022 - 11:56
Sorry i should also have added that holding the leases on trust for someone else (even including yourself) is effectively a breach of the mortgage conditions and although i am condoning it you wouldnt be the first person to do this.

Also, please dont think my proposal means that its going to take any longer because the whole process of (a) granting the leases; (b) transferring the freehold; and if you want (c) assigning the leases back into you and your wifes name; subject to the finance being ready, all of that can be done on the same day with decent planning. Charles

Stu Lu

19:17 PM, 20th May 2022, About 3 months ago

In response to the suggestion by Charles, as I understand it, you cannot grant yourself a lease.

CMS View Profile

19:23 PM, 20th May 2022, About 3 months ago

Reply to the comment left by Stu Lu at 20/05/2022 - 19:17
in response to Stu Lu, you cannot grant the same individuals/company. entity etc a lease over the same property as it merges with the freehold however that is not what is happening in my suggestion as in each example it is the husband and wife granting a lease of a flat to one of them. The fact that the leaseholder is one half of the freeholder is neither here nor there as the interests would not merge.

I have done this 30-40 times i guess. It definitely worked on those occasions. Best, Charles

Ian McDermott

14:28 PM, 24th May 2022, About 3 months ago

Hi Charles and thank you for your suggestion.

I understand that this type of arrangement is called a 'criss-cross' or 'Tyneside' agreement whereby the freehold (owned by H & W) is subject to the new lease granted to H (flat 1) and W (flat 2). I have done this once before when a mortgagee wasn't involved and there wasn't a liability for SDLT or CGT so I think you are correct in your recommendations.

'The owner of the First Floor Flat (FFF) will own both the leasehold title to their flat but also the freehold title to the Ground Floor Flat (GFF) and vice versa.'

This solution would I think work for us but would then involve two separate applications because the new leases would be in either H or W's name as opposed to jointly owned.

Do you think there is a way to end up with leases in joint names (or theoretically everything in one name) so that the new borrowing is simplified. The lender has said that if the properties are owned jointly then it would be one application and one loan for everything. This would again reduce the setup costs when remortgaging.

There is one other complication (and it was going so well!) but I'll divulge that later as it may be resolved by any response to the last questions.

Ian McDermott

14:50 PM, 24th May 2022, About 3 months ago

I've just heard back from a broker who says the 'Tyneside' restructuring would limit the lenders who would deal with us and potentially attract the higher rates again.
Would the following cause problems:
1.Transfer the freehold in to Ltd company
2. Ltd company issues leases to H and/or W
Would this approach attract SDLT even though the freehold would be worth 'nothing' and ultimately the new leases would be worth the same of the old freehold

CMS View Profile

3:29 AM, 27th May 2022, About 3 months ago

Reply to the comment left by Ian McDermott at 24/05/2022 - 14:28
Hi Ian, so sorry for my delayed response but I have only just seen this. Yes i do think that there is a way but it's a paper exercise more than anything else. In brief it would work like this and all happen on the same day immediately after each other:

a) H&W own 4 flats.
b) H&W grant 2 leases to H out of the freehold and 2 leases to W out of the freehold;
c) At the same time as b) above whomever holds the leases enters into declarations of trust confirming held 50/50 so no CGT;
d) The holders of the lease then transfer the leases back into joint names and confirm in the transfers that there is no intention to merge the leases with the freehold.

The one 'legal' issue is that, if you have a mortgage on the existing property, granting the leases is a breach of that mortgage, however, as you will be paying it off immediately after granting the leases this is normally not considered an issue by lawyers so far as i am aware.

CMS View Profile

3:32 AM, 27th May 2022, About 3 months ago

Reply to the comment left by Ian McDermott at 24/05/2022 - 14:50
I have never heard it called a 'Tyneside' and am not sure why it should cause an issue. All you are doing is taking a new lease that's all the broker needs to be aware of to be honest. I wouldn't think that they need to know the rest. I would just say that 'we are taking brand new leases of all 4 properties and see if they will value them on that basis'. If you get nowhere with this let me know as i know a broker i can explain this to and i am sure he will help. Let me have your email if you want me to contact you.

CMS View Profile

3:51 AM, 27th May 2022, About 3 months ago

Reply to the comment left by Ian McDermott at 24/05/2022 - 14:50
Ok, i will give you a detailed answer on this (apologies if its a bit of a lesson) and sorry if you already know all of this but it might help you now and in the future. (PS just go straight to the bottom if you are bored as i have a potential solution for you).

When looking at something like this you need to consider who has the benefit of the actual 'value' of the property and whether this is actually moving.

On day one the house is worth say £250k. On day two you want to transfer the freehold to a company. Is there any value passing? Yes there is as the property worth £250k is passing to the Company and as they are linked to you SDLT would be charged on market value and possible CGT (not an expert in that).

With my example of granting long leases before transferring to the Company you are effectively reducing the value of the property being transferred to the company as, by the time it is transferred to the Company, its subject to 4 leases.

Having gone through that, here is a potential solution but (a) frankly it amounts to exactly the same as my suggestion of H&W leasing to H or W etc but banks don't care about what actually legally works tbh and (b) you will again need to do this all on the same day.

(a) you set up a Company;
(b) H&W enter into a declaration of trust with the Company whereby the Company accept to take the property on trust for H&W in the existing shares. No beneficial title transfer so no CGT;
(c) H&W instruct Company to grant the 4 leases;
(d) H&W pay off mortgage;
(e) H&W transfer the beneficial title in the freehold of the property to the Company.

Result is:

Company own freehold;
H&W end up with 4 leases.
Transfer of the freehold to the Company will not attract SDLT as the value will be nominal and the CGT will likely be below your given annual thresholds (depends on other transactions during the year of course).

How does that sit with you Ian? If you don't mind me asking - have you got a solicitor to deal with this? If not, do you want me to deal with this for you? i don't mind if you do have a solicitor and want to give them the above solution (happy to help) but if you need anything more then send me your email on here and i will contact you. I can either act for you or if your solicitor doesnt mind i can simply oversee the transaction to make sure its right and works.

I hope all this helps and again sorry for the delay in responding. Best, Charles

Ian McDermott

9:28 AM, 6th June 2022, About 2 months ago

Hi Charles and sorry for the delay in response to your question.
I have approached a couple of solicitors. One is the the Father in laws old firm (now retired from) as they created a criss-cross having finished converting a property and also another firm who have done some work for me in the past. I've forwarded them your comments but have not heard back from either yet so I'll keep you posted.
The only last issue I think is a property registered in my name only. Do you think there is a way to create leases for this, put it in to joint names so that all are set up in the same ownership as the others going forward?
My email is ian@gblettings.co.uk and happy to talk to you direct.
Thanks, Ian

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