Due to new decreases in tax relief on mortgage interest payments, landlords are looking at forming companies and moving ownership of their buy-to-let properties to these companies. This move is believed to save tax as the company will pay less of it than if the landlord is taxed as a private individual.
However, according to an October 2016 Daily Telegraph article, some accountants have expressed concern over the procedure known as ‘beneficial interest company trust’, where an existing commercial mortgage is transferred from an individual to a company. If the company remortgages the property, then there would not be a problem, but remortgaging will incur administrative fees and could be at a higher interest rate than the existing mortgage.
Accountant Nimesh Shah has warned that under the Income Tax Act, individuals cannot transfer an income stream to a company in order to avoid tax. He said that HMRC would see transferring an existing mortgage as a tax-motivated procedure.
Shah explained:
“The test is to do with why you’re incorporating. Is there a commercial rationale, or is it a tax reason? In a normal incorporation situation everything is going into the company. Here you’re splitting the income and the ownership out, which makes it more of an issue.”
Mark Smith of Cotswold Barristers, which promotes the beneficial interest company trust service, disagrees and says that the procedure is legitimate. If the borrower defaults on payments, then the lender can still make the individual landlord responsible rather than the company.
