In an interview with Mortgage Solutions, Michael O’Brien, managing director of brokerage Home of Mortgages, said succession planning was “dominating the conversations right now”. He said it was a topic that his team brought up regularly with landlords.
But a recent survey by the National Residential Landlords Association (NRLA) revealed that it isn’t a topic at the forefront of every landlord’s mind. It found that a third of landlords have not considered future inheritance bills.
Brokers, while not qualified to give tax advice, are in a prime position to explore landlords’ plans for the future of their properties, the consequences of those plans and – with the help of a tax adviser – how to mitigate them.
Jonathan Alvarez Herrera (pictured), mortgage consultant at Ayla Mortgages, shared his tips on how to approach BTL succession planning with your landlord clients.
Have the end goal in mind from the start
The conversation shouldn’t just be about the mortgage they need today, but also their long-term plans and why.
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Most small landlords – owning 1-3 properties – either want to pass them on as inheritance for their children or use them as a pension vehicle, but do not consider this when arranging the mortgage. Without knowing their end goal, a broker may focus on getting the lowest monthly payment possible to maximise their return on investment – which may not be their priority.
Alvarez Herrera said: “After having a proper conversation with them, actually you find that for most landlords in their 40s, they’re not always looking for the highest return on investment now. They might want to use the properties as a repayment vehicle, their pension in later life or to leave behind as an inheritance.
“Instead of having a conversation about their strategy over the next 1-5 years, it’s worth having a conversation about what their 20-, 30-, 40-year strategy is.”
Structure the portfolio accordingly
Once the goal is established, the broker can discuss whether to hold property personally or via a limited company.
“Before going down either route, it’s crucial to involve an accountant or tax specialist. Many landlords will already have one, but if not, having a trusted professional to refer to is essential,” said Alvarez Herrera.
He recommended his own tax adviser to landlords who don’t have one. For brokers who don’t have their own adviser, he suggested speaking to trusted landlord clients and asking for their recommendations.
Having a conference call with the landlord and tax adviser is a good way to make sure the tax-efficient recommendation, such as using a trust, does not prevent the landlord from being able to get a mortgage.
“There are lenders out there that do mortgages for a trust, but I’m talking two or three, and their rates are extremely expensive. So it’s vital we all work together early to avoid costly surprises,” he added.
Consider involving the family
If the landlord doesn’t object to discussing plans with their intended beneficiaries, it can highlight potential issues early. Brokers can check if the beneficiary would qualify for a mortgage when they need to refinance it further down the line.
For example, if a landlord plans to leave a property to their daughter but she has significant adverse credit, such as a bankruptcy, it could influence the type of mortgage recommended.
It may be better to take a capital repayment mortgage to leave the property unencumbered to their daughter, rather than an interest-only mortgage, which she will be unable to refinance if she keeps hold of the property.
Or, if the family member to receive the property lives abroad, they would likely need an expat mortgage at some point in the future, or to consider if the tax implications of owning a UK property in their country are different to someone who owns that property in the UK.
Alvarez Herrera said: “I recently advised a landlord whose daughter lives in Italy and would inherit his property.
“Yes, we’d be able to arrange an expat buy-to-let remortgage for her, but it would be at a higher rate. If that was the strategy, we can start reducing the mortgage balance, so that when she does inherit the property, it will have a relatively small mortgage and the interest rate will be less important.”
Explore lender flexibility
In some cases, lenders may allow a future beneficiary to take a minority shareholding – often under 25% – in a limited company from the outset, which can make the eventual transition of the business smoother.
Robert Leatherland, financial adviser at Bespoke Wealth, said: “A family investment company is a UK private limited company with family members as shareholders. If purchasing of property and other assets is being undertaken with future generations in mind, this option is worth considering.”
Parents often hold the voting shares, which gives them the control, while the children or other relatives hold non-voting shares, making them growth beneficiaries.
“The purpose of this is to look at future family planning of family wealth in a controlled, tax-efficient manner – to pass value to future generations while maintaining control over decision-making,” Leatherland added.
