I’m having a very senior moment (at 46).
When calculating the entry charge for a relevant property trust, is the mortgage taken into consideration? For example, if the property is worth £400,000 but the mortgage is £100,000 there will be no entry charge?
Who are the borrowers now and who will they be after the property is transferred into trust?
Jack Harper
It’s a mortgage lender (the Halifax) and only the beneficial interest is being transferred in. The mortgage will continue to be held personally and will remain with the Halifax.
The TOV will be £400k. The borrowers will remain liable for the mortgage to the exclusion of the trustees. The borrowers will have no further access to the property or any income from it to pay off the debt or the interest (essential to avoid a GROB). I presume that the contract permits the transfer.
Alternatively the borrowers could transfer to the trustees their equity of redemption.The equity of redemption can be dealt with by the borrower, for example by assigning it to the trustees (unless excluded by the terms of the security). It is, per Snell and Megarry & Wade, an equitable interest in the land consisting of the sum total of the mortgagor’s rights in the property and thus amounts to ownership of the property subject to the mortgage. Where security over land takes the form of a charge by way of legal mortgage the borrower retains legal title to the land. Although the equity of redemption appears to be integral to the borrower’s legal estate in the land, it does not merge with it and remains a stand-alone equitable right, per Snell. Again I presume the contract does not prevent assignment. I think this is a shearing exercise so not a GROB.
In the second case the TOV is arguably £300k but might be less. What would a hypothetical willing buyer pay a hypothetical willing seller for the transfer where he has no control over the borrower running up interest arrears so increasing the debt or defaulting so that the lender might sell under its power? Though the lender is bound to act in good faith and take reasonable steps to obtain a proper price that price might be less than if the borrower had unfettered control over the sale. In theory the lender could foreclose, which extinguishes the equity of redemption altogether! Foreclosure has certain disadvantages for a lender so is rare in practice. Also the court, which controls the process (one of the downsides, together with its related expense), has a discretion to order a sale instead, which it is very likely to do where the proceeds would yield a reasonable surplus for the borrower. However, all these lovely theoretical uncertainties are grist to the mill in talking down the amount of the TOV.
Obviously the drafting must be attuned to which of these very different transactions is selected.
Jack Harper
IHTA 1984 s2 defines “chargeable transfer” and s3 “transfer of value”.
Under s3 the measure of a transfer of value is the amount by which the transferor’s estate falls due to the transfer. Thus, if the loan remains with the transferor and only the property is transferred the fall is (on your figures) £400,000.
Malcolm Finney
Malcolm’s comment refocused me. The TOV in the second case (transfer of equity of redemption) should be, on a loss to donor basis, £300k. My smartiboot remarks about its uncertain value would be relevant in calculating IHT RPT charges where the value of the property settled is an essential component in the first 10 years and thereafter its then value at 10 year anniversaries.
Jack Harper