THE EVER-CHANGING landscape of UK tax law has prompted landlords to explore alternative legal structures for tax efficient property ownership. One such structure gaining more attention recently is the Beneficial Interest Company Trust (BICT). However, as will be seem below this complex model is not without its challenges and debate.
In today’s Shipleys Tax brief we will look at the workings of a BICT, its potential benefits, drawbacks, and the key considerations for landlords considering this route.
What is a Beneficial Interest Company Trust (BICT)?
A Beneficial Interest Company Trust (BICT) is a legal structure that has gained popularity among landlords in the UK, particularly following changes to the infamous Section 24 income tax relief in 2017 for rental income. BICTs seemingly allows landlords to strategically manage the economic value of their properties in a company, while retaining the “legal” title of the property, and thus the mortgage, in their personal name.
BICTs: The Appeal for Landlords
There are several key reasons why landlords are increasingly adopting BICTs. The trust structure purportedly enables landlords to enjoy personal mortgage rates on properties, while treating them as company assets from a tax perspective. In light of the restrictions on interest relief announced in 2015, landlords can put the rental income from personally held property (and related borrowing costs) through a Limited Company to help minimize their tax liability.
Perceived Key Advantages of BICTs for Landlords
- Mitigating the Impact of Section 24 Interest Relief Restriction: BICTs can help landlords offset mortgage interest against rental income, thus reducing their tax liability.
- Preserving Personal Tax Allowances: BICTs allow landlords to ensure rental income falls within the corporation tax regime, not subject to personal income tax. This can maintain access to personal tax allowances, beneficial when rental income is taxed at higher individual tax rates.
- Future Planning and Flexibility: BICTs offer flexibility for estate planning and asset transfer to future generations. The trust structure allows for the addition of beneficiaries or changing the ownership structure without transferring the property’s legal title.
The Risks and Challenges of BICTs
While BICTs might seem like a silver bullet, they are not without significant complexities and potential pitfalls. Landlords should exercise caution and thoroughly consider these key challenges:
- Complex Legal and Tax Implications: BICTs involve intricate legal and tax arrangements. Ensuring compliance and avoiding unintended consequences requires advice from professionals well-versed in trust law and tax legislation. There is debate within the tax profession about this structure. Some have suggested potential mortgage fraud, mismatch of income and mortgage interest relief, and likely challenges from HMRC on the basis that such a structure is “tax-motivated” rather than commercially motivated and therefore subject to anti-avoidance legislation. HMRC will not provide approval for BICTs because these have nothing whatsoever to do with tax. This is because the company itself has no tax advantages over and above any other form of UK limited company.
- Lender’s Reluctance: Some lenders are wary of BICTs, fearing they could be seen as contrived and fall foul of HMRC anti-avoidance legislation. This perception could impact a landlord’s ability to secure mortgage finance, and if the BICT is deemed a tax avoidance scheme, landlords could face a hefty tax bill.
- Costs and Administrative Burden: Establishing and maintaining a BICT can be costly. The ongoing administrative responsibilities include filing annual accounts and tax returns for the SPV, which can be time-consuming.
- Potential Future Legislative Changes: Tax laws and regulations evolve over time. There’s no guarantee that the current tax advantages linked with BICTs will persist. Future legislative changes could impact the viability of BICTs.
- Financing Challenges: Transitioning properties into a BICT can create financing difficulties. Lenders often have different criteria and loan products for SPVs compared to individual landlords.
To BICT or Not to BICT
BICTs have provided some landlords with a strategy to navigate the tax challenges, but they are not a one-size-fits-all solution, nor are they a sure fit. Each landlord’s circumstances and objectives are unique, making it crucial to conduct a thorough assessment and seek professional advice tailored to your specific situation before considering such a legal structure.
Always remember that tax planning is not a short-term endeavour. Before moving forward with a BICT or any other tax planning strategy, taxpayers need to ensure that they are comfortable with the potential outcomes and have considered all available options.
Consulting with a qualified tax adviser and a mortgage consultant before making any decisions is crucial. As the tax difference between personal name and limited company rates continues to narrow, the cost-effectiveness of BICTs may also change.
In conclusion, while the BICT is an available solution for some landlords, understanding its pros and cons is essential to making an informed decision. Remember, effective tax planning is about strategy, not just short-term gains.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email firstname.lastname@example.org.
Please note that Shipleys Tax do not give free advice by email or telephone.
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