Mortgage and bare trusts

xpjpx2000

Hi everyone,
I have a question about investing money from a bare trust into a mortgage.

My partner is trustee of a bare trust for our son. The trustees wish to invest some of the funds from the trust into the property we live in and give him a 10% stake in the property.

So for example, property worth £500k. Current mortgage of £100k. Trust to invest £50k in property leaving mortgage of £50k and giving beneficiary 10% stake in property.

The lawyer says this is ok to do but HSBC said they would not accept stakes from trusts in their mortgages. Is this right? If so, is this common across banks and mortgage lenders? Is anyone able to suggest any mortgage lenders that will accept a stake from a bare trust?

Many thanks,
Paul.

foxy-stoat

You want to borrow £50,000 from your bare trust to clear half your mortgage?

Will you be paying back the £50,000 cash when the property is sold, making monthly payments back to the trust or will the trust own 10% of your property so will you pay rent to the trust as income?

You will have to have a charge placed on the property in favour of the trust for 10% of the property value.

If your current lender wont entertain this then it may not be worth changing lenders for the sums of money involved.....if the Trust has £100,000 then you could clear your mortgage and make any arranagements you like.

xpjpx2000

Hi, thanks for your reply. We would give our son 10% of the property so when we sold it he would get 10% of the final selling price as this is an investment for him.

ACG

Lenders and trusts are not a great mix.
But I do not see the benefit to your son, presumably he would inherit the property anyway?

kingstreet

The property is mortgaged.

The owners of the property cannot be changed without the consent of the lender. The lender won't agree to a Trust being mortgagor and owner. Not sure any lender would accept this.

Selling a stake is therefore not possible while there is a mortgage in place.

As foxy has suggested, the sensible route is for the Trust to lend you the money and for a charge to be taken over the property. You will need to have commercial terms drawn up for the interest you will pay and the growth in the equity which the Trust will accrue on disposal (when you sell, die etc).

MattTheMoneyGuru

I believe the balance in a bare trust may be exempt from inheritance tax as long as the person transferring survives for 7 or more years after making the transfer.

AnotherJoe

Massive conflict of interest here

You seem to be helping yourself, not your son.

On the upside for him, when he is 18 should it have gone wrong, he can sue you for what it could have grown to if better invested, and should it go right he can force a sale of your house if you haven't got the ready cash. Win win for him.