It is no secret that London has been a very popular destination for foreign nationals looking to enhance their property portfolios. As a consequence of the changing regulatory playing field, many foreign investors have chosen to go down the trust route as a means of protecting their assets from a range of taxes. While this is perfectly understandable, and perfectly above board, it can cause issues when looking to refinance trust property especially when the settlor is no longer available. Indeed in years gone by we have seen some clients looking to unravel trust structures as a means of simplifying future refinancing and property development.
This case study involves a trust property held on behalf of a beneficiary who is actually living in the property. While this in itself is no issue, perfectly within the trust regulations, the fact that the beneficiary was an Egyptian national created a number of challenges for any refinancing. However, as an independent mortgage broker we have access to more than 300 lenders many of whom are extremely flexible when it comes to foreign national mortgages/refinancing.
Recent UK governments have introduced an array of new legislation regarding property, foreign nationals and additional levels of taxation. For many wealthy individuals looking to leave assets for their family the only real tax efficient option has been to hold them within a trust structure. Whether we will see a reduction in these taxes under Boris Johnson’s government remains to be seen but at this moment in time we need to work within the current framework.
The property in this case study was worth £3 million and the client was looking for a £1.8 million remortgage, which equated to an LTV ratio of 60%. At first glance the LTV ratio was towards the top end of the more traditional range but there were other issues to take into account. The client is a foreign national living in the trust property and unfortunately there was limited proof of income. As the client was the beneficial owner of the property, via the trust structure, they would need to authorise the refinancing in the absence of the settlor. So in effect any company looking to provide mortgage funding would need to review the client’s situation and income.
The basic scenario was as follows:-
Client: Egyptian resident (beneficiary of a Trust)
Residence: Living in the trust property
Income: Limited proof
Property value: £3 million
Mortgage requirement: £1.8 million
LTV ratio: 60%
It was not difficult to see even with a quick glimpse at the client’s scenario that both their foreign national status and limited proof of income were hurdles we would need to overcome. These are hurdles which are by no means insurmountable but we also needed to ensure an extremely competitive rate on any mortgage funding. Even though UK base rates are expected to soften in the short term there are still some extremely attractive fixed rates on offer.
Issues to address
Over the years we have acted for approaching 100 different nationalities with property investments spread across the globe and held via various financial structures. A foreign national living in a trust property as a beneficiary is not uncommon but does obviously create some challenges. We were also fully aware that the 60% LTV ratio would effectively rule out traditional mortgage lenders leaving private banks/niche lenders in the frame. There was no talk of an AUM arrangement but what we did find out during initial discussions with the client was the existence of a personal portfolio of investments. As a potential structure for the funding began to form we knew we could use the value/income from the client’s investment portfolio as a form of security – a funding vehicle.
In summary the issues to address were fairly simple:-
Client: Egyptian national (Trust beneficiary)
Income: Limited proof
LTV ratio: 60% (towards top end of traditional range)
Property: Held under Trust structure
The key to securing the most competitive terms for any lending is to utilise both income and assets to the maximum. This must obviously be done within a framework which does not overstretch the client’s finances but provides sufficient security for lenders to encourage competitive quotes. Historically the issue of dealing with foreign nationals, especially where there is limited proof of income, has been challenging. The situation today is very different with an array of private banks/niche lenders willing to consider such situations with a degree of flexibility, even when it comes to proof of income.
So, we have a property worth £3 million and a £1.8 million refinancing to take advantage of current mortgage rates. While some clients have dissolved trust structures to refinance property, there was no need to go down this road in this particular situation. Even though the client was a foreign national with limited proof of income we were able to find a bank offering a degree of flexibility regarding lending criteria. Using the client’s personal investment portfolio within a viable repayment strategy gave us a degree of strength in negotiations. This ensured that in the event of any financial difficulties further down the line there were sufficient funds available.
The exact details of the funding solution were as follows:-
Property value: £3 million
Total funding: £1.8 million
LTV ratio: 60%
Type of funding: Interest only
Mortgage interest rate: 2.39%
Fixed period: Two years
The fact that we were able to arrange this type of funding for a foreign national with limited proof of income reflects our appreciation of mortgage market options and our growing contacts. Whatever the scenario, we know the best lenders to approach, the information they require as well as the degree of flexibility on offer. In this situation we managed to find a solution and negotiate a very competitive rate by using additional personal assets of the client.
What can Enness do for you?
As we touched on above, the tax scenario for domestic and overseas investors in the UK has become more complicated and in depth in recent years. It is therefore no surprise that ultrahigh net worth and high net worth individuals are now considering trust structures as a means of protecting their assets in the future. This can cause challenges, as you can see from the above case study, where refinancing is required, the settler is no longer available and the beneficiary has limited proof of income. These elements would be challenging in isolation but bringing them together created quite a conundrum. However, as we mentioned above, we are experts in bespoke funding arrangements and we know who to approach, what they require and the level of flexibility. One of the main keys to securing the most competitive terms is to inject a degree of competition amongst potential lenders – something we are experts at.
So whether you are a foreign national looking to acquire UK property, or UK national looking to acquire overseas property, we would welcome the opportunity to discuss your requirements in more detail. Over the years we have dealt with approaching 100 different nationalities involving asset spread right across the globe. When it comes to trust structures especially, there is no one size fits all solution but we are experts at creating bespoke funding arrangements. We will be able to provide you with real-time market rates so that you can compare and contrast cash flow as well as short, medium and long-term financial liabilities. In this case study we were able to maximise funding using the client’s investment portfolio as a repayment vehicle. While it is obviously important to maximise income and client assets, this needs to be done in a controlled manner which doesn’t overstretch the client’s finances – something we are acutely aware of at all times.