Wealth planning

How you can use mortgages to save tax, downsize - and more

With interest rates frozen at record lows, tailored, short-term finance can be a highly effective planning tool

24/07/2018

Richard Dyson

Richard Dyson

Head of Content

Low interest rates continue to offer opportunities to those who wish to borrow over the short or long term, whether the aim is to raise cash quickly to secure a property, as an alternative to selling investments, or for a range of other reasons.

The Bank of England’s leading Bank Rate last November moved up a quarter of one percentage point from its all-time low of 0.25% and now stands at 0.5%. While there is a weakening consensus prediction that the Bank Rate will rise again toward the end of this year, the overall outlook is for continued low rates.

“A low cost of borrowing can mean that in certain circumstances a short-term loan is a financially efficient option,” said Alex Whitburn, Cazenove Capital’s Head of Banking and Treasury.

He explained a range of scenarios in which a need to raise finance can be more cheaply met via a short-term loan than other options, such as the sale of assets.

“There are both tax and cost issues associated with the sale of investments. For example, a major consideration for many is capital gains tax.”

He cited the case of one client where the sale of investments would crystallise capital gains tax liabilities of several hundreds of thousands of pounds. “Here, the costs of the loan were significantly less than the potential tax liability.” (See the case studies below for more details.)

How a loan can ease the process of downsizing

Some assets, including property, can take time to sell.

The use of a loan potentially allows for an unhurried sale and improved chances of a favourable price. And if the purpose is to raise cash speedily in order to purchase a property, for example, a loan may be the most timely solution. A number of Cazenove Capital clients have been able to make quick offers on rarely available properties in Britain and elsewhere thanks to easily available leverage from our banking division.

These loans could also facilitate an easier move, particularly where a family home is being replaced. 

“We have helped in a number of cases where families want to downsize,” explained Alex. “Here a short-term loan, or bridge, allows the new property to be bought and refurbished, if necessary, while the family continue to live in their former home. 

“The timing of the move then comes under their control.” 

A loan may also afford some flexibility in which to plan for wider tax-efficiency, including mitigating inheritance tax. 

Money raised through a loan and, for example, given to children for the purpose of buying property (or any other reason), falls under the usual “potentially exempt transfer” rules. These allow for the gifts to drop outside the estate provided the “donor” – the person making the gift – survives seven years from the date of the gift. 

Age and other factors can limit the availability of standard mortgages

The majority of mainstream mortgage lenders impose age restrictions – along with other conditions, including income requirements – which may exclude older borrowers. A typical maximum age beyond which mainstream banks will not lend is 75 years old.

Individuals who have structured their investments with an eye to limiting income tax liabilities may find that they fail High Street lenders’ income requirements, too. Separately, these lenders can be inflexible about offering mortgages to individuals who are not named on the title deeds of the property involved.

If a mortgage is the answer, it is likely to have to come from a niche lender prepared to write loans on an individual basis.

“We are also increasingly seeing people who want to borrow in order to help adult children buy properties,” said Alex. “A typical scenario would be that parents take a loan to raise the deposit allowing the child to obtain a mainstream mortgage from a High Street bank. The parents can then repay their loan through a variety of measures including investment sales or from income.”

Case study one: the downsizer

A couple aged 69 and 73 required a short-term £1.6m loan to buy a smaller property. They owned their £8m home outright and the new property was priced at £3m. They wished to own the two properties concurrently for a short period to help with the move, but the intention was to sell the £8m property in due course.

Rather than sell any of their joint £7m investments, they sought a short-term loan.

Their age and incomes made mainstream mortgages unobtainable, but Cazenove Capital was able to advance a loan against the value of their portfolio. Both property transactions were undertaken and a favourable price achieved for the sale of the former home.

Case study two: borrowing to assist younger family members

In a similar case, a man in his 90s wished to raise capital to enable a younger relative to purchase a property.

He could have realised the money through the sale of investments, but this would have triggered a capital gains tax bill estimated at £500,000.

On the basis of cost alone, a loan secured against his investments was a more efficient solution.

Cazenove Capital's banking division loans to existing clients and is prepared to accept the value of their client portfolios and/or residential property as security. Loans are underwritten on an individual basis. Where we can't help, it may be possible to introduce clients to mainstream brokers with knowledge of the wider market offering. Cazenove Capital receives no commission or fee in these cases.

Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

Author

Richard Dyson

Richard Dyson

Head of Content

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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