Solicitor advises lenders's permission isn't required for Declaration of Trust

[Madmax86]

I own a property in sole name and mortgaged.

I'm looking to transfer the beneficial interest to my wife via a Declaration of Trust as she doesn't work to utilise her tax allowances.

I've asked several solicitors if they need to request permission from the lender and they've all clearly stated that the lenders's permission isn't required. Some have even emailed their responses so I have proof.

Now I understand that this will breach my lender's T&C's.

If I decided to proceed and let's say the lender found out in the next few years and penalised me, will the fact that I have proof from solicitor be worth anything?

Interested to hear from other solicitors.

[Lawcruncher]

If a lender's permission is required to do something and you do it the fact that a solicitor said you could will not help as the solicitor will have been wrong. There can only be an exception if some rule of law says that requiring the permission is unlawful.

Are you sure that executing a declaration of trust will breach your mortgage conditions? Making a declaration of trust does not affect the lender's security.

[Madmax86]

Are you sure that executing a declaration of trust will breach your mortgage conditions? Making a declaration of trust does not affect the lender's security.

Ha! I seem to be going back and forth with this one. I've read a few of the discussions regarding this on this forum plus I posed this discussion yesterday and it seems it's a controversial topic.

A lot of solicitors have said what you have said, that it does not affect the lender's security so as a result there is no reason to notify them. Yet it is mentioned in their T&C's not to change the beneficial ownership.

I'm starting to wonder if it's similar to streaming movies online - illegal but minor and slim chance of finding out.

[AndrewDod]

Absolutely no reason to start another thread on the same topic and then say that it is "controversial" with a "back and forth".

You are correct (as is Lawcruncher) -- the mortgagee has not lost their security in some very narrow sense. They can still take the property away. But YOUR security is affected (you have just given away a 300K asset) and still owe the mortgage. Since your financial status has changed in a fundamental sense, not informing them would place you at severe risk. Just as you might have to inform them if you lost your job, a loanee died etc....

And as already explained in another thread, there are a multitude of ways they will find out.

What does the small print on your mortgage say?

The lender's security also depends on the state of the property market and the cost of selling forfeited properties. I have no doubt that in very large swathes of the current mortgage market the lender is not fully secured by the property itself, especially if there were to be a small downturn in the market with lots of defaulters.

If the only thing that determined the security of the lender was the potential sale price of the asset, they would not bother to check the financial security of loan applicants ever. In fact when someone defaults on a mortgage and a property is sold the lender not only incurs costs but also incurs the cost of all of the (at least one third) of the value of the property in profit they would have made from the difference between the future mortgage rate and their borrowing rate.

To be blunt if many mortgaged properties were to default, then even if they were to repossess and attempt to sell the properties, the bank would go bust, as would the taxpayer. Recent history of financial markets tells us that.

[jpkeates]

Are you sure that executing a declaration of trust will breach your mortgage conditions? Making a declaration of trust does not affect the lender's security.

It does affect the lender's security.

The OP's proposed solution has two possible problem outcomes.

One is that the trust being created to transfer the beneficial ownership doesn't actually achieve this, because the charge placed on the property by the lender means that the beneficial interest isn't available to the person to whom the trust purports to transfer it to. If the lender's charge means that the property can't actually be transferred to the trust beneficiary to sell if they want to (for example), beneficial ownership remains with the titleholder and they are liable for the tax on the income.

If the trust succeeds, the beneficial ownership of 99% of the asset which secures the loan is now in the control of someone who is not named on the mortgage. If the lender tried to take possession of the property (because the title owner failed to make the mortgage payments for example) there would be a competing interest to overcome. The lender is, at minimum, inconvenienced by this and might fail in their attempt to repossess more than the residual 1% owned by their mortgagee. The wife has no relationship with the lender and won't, personally, have breached any terms herself.

[Madmax86]

Absolutely no reason to start another thread on the same topic and then say that it is "controversial" with a "back and forth".

I’ve changed my post and posted it on the conveyancing section to hopefully get some thoughts on the solicitor side of things and also some fresh opinions but well done, you've found me and again dominated the thread with the same info you’ve mentioned already.

[Lawcruncher]

You are correct (as is Lawcruncher) -- the mortgagee has not lost their security in some very narrow sense. They can still take the property away. But YOUR security is affected (you have just given away a 300K asset) and still owe the mortgage. Since your financial status has changed in a fundamental sense, not informing them would place you at severe risk. Just as you might have to inform them if you lost your job, a loanee died etc....

Very broadly...

The mortgagee retains his security in a very wide sense. If he did not the security would be undermined and the law does not allow that. There are two main elements to a mortgage. One is the security of the charge on the property and the other is the covenant to repay the capital sum and any interest. Neither of those are affected by any subsequent dealings of the mortgagor made without the consent of the mortgagee.

It is of course the case that a mortgagor who one way or another disposes of his interest will remain primarily liable under the covenant to repay if he is not released from it by the mortgagee, but that is a risk the mortgagor takes. However, any disposal does not increase his liability.

[Lawcruncher]

It does affect the lender's security.

See above.

One is that the trust being created to transfer the beneficial ownership doesn't actually achieve this, because the charge placed on the property by the lender means that the beneficial interest isn't available to the person to whom the trust purports to transfer it to. If the lender's charge means that the property can't actually be transferred to the trust beneficiary to sell if they want to (for example), beneficial ownership remains with the titleholder and they are liable for the tax on the income.

What is available is what is generally referred to as the equity of redemption which is a right in land which can be transferred like many other rights in land. The fact that the value of the right may be nil or negative does not alter the position since the value varies according to the value of the property and the amount outstanding on the mortgage.

If the trust succeeds, the beneficial ownership of 99% of the asset which secures the loan is now in the control of someone who is not named on the mortgage. If the lender tried to take possession of the property (because the title owner failed to make the mortgage payments for example) there would be a competing interest to overcome. The lender is, at minimum, inconvenienced by this and might fail in their attempt to repossess more than the residual 1% owned by their mortgagee. The wife has no relationship with the lender and won't, personally, have breached any terms herself.

There is in fact no competing interest because the lender's interest takes priority. Lenders can be inconvenienced by a wide range of unsustainable claims, but ultimately they can realise their security and enforce the covenant to repay given by the borrower.

[jpkeates]

There is in fact no competing interest because the lender's interest takes priority. Lenders can be inconvenienced by a wide range of unsustainable claims, but ultimately they can realise their security and enforce the covenant to repay given by the borrower.

Mortgage lenders choose not to be inconvenienced and forbid the transfer of beneficial interest in their terms.

They are now (since 2008/9) required to be seen to be actively monitoring the portfolio of assets that they have loans secured against (having failed to do that pretty spectacularly up to that point).

What is available is what is generally referred to as the equity of redemption which is a right in land which can be transferred like many other rights in land. The fact that the value of the right may be nil or negative does not alter the position since the value varies according to the value of the property and the amount outstanding on the mortgage.

It might not alter the position of the lender or the mortgagee but it does affect the tax position, which is the purpose of the change.
If the beneficial ownership isn't actually with the beneficiary of the trust, there's no change in the liability for tax.
If the value of the ownership transferred is zero, the percentage of the property ownership being transferred is a fiction.

Here's 99% of a £500k asset, it has no value while you own it.
The only way of obtaining the value of the asset is returning it, but you are allowed to take all of the income paid to me and deflect my tax liability.
I can see HMRC loving that!

[Lawcruncher]

Mortgage lenders choose not to be inconvenienced and forbid the transfer of beneficial interest in their terms.

Lenders may forbid it, but they cannot prevent it.

It is a basic principle of the law that property is freely alienable. On the whole the law does not allow restraints on alienation. There are exceptions, but forbidding the creation of beneficial interests cannot be one of them because, as explained, their creation does not affect the lender's security or the borrower's covenant to repay. Suffering inconvenience does not affect either.

They are now (since 2008/9) required to be seen to be actively monitoring the portfolio of assets that they have loans secured against (having failed to do that pretty spectacularly up to that point)

Commercial lenders are in business to make money by charging interest on the money they lend. It is in their interest and socially also the borrowers, to make sure they lend money to people who look like they can afford to keep up regular payments and. so far as possible, to make sure that that does not change. But that is quite separate from the security aspect.

It might not alter the position of the lender or the mortgagee but it does affect the tax position, which is the purpose of the change.

Agreed.

If the beneficial ownership isn't actually with the beneficiary of the trust, there's no change in the liability for tax.

I do not see how the beneficial can be anywhere other than with the beneficiaries.

If the value of the ownership transferred is zero, the percentage of the property ownership being transferred is a fiction.

The equity of redemption is all the rights of the borrower in the property. If the amount owing on the mortgage exceeds the value of the property the lender still "owns" the property and has rights over it. It is irrelevant whether at the time it is transferred if the value of the equity of redemption (not to be confused with the value of the property free of any mortgage) is positive, nil or negative.

The only way of obtaining the value of the asset is returning it, but you are allowed to take all of the income paid to me and deflect my tax liability.
I can see HMRC loving that!

Not sure I follow that.

[Madmax86]

Thank you Lawcruncher for giving your thoughts.

So if I understand you correctly, you deem the mortgage lender to be less of a concern, but more my own risk if let's say mine and my wife's relationship broke down and threatened my ability to repay my mortgage, whether that be via divorce or death. If the latter, I'm assuming will planning will be needed.

Does that sound right?

[Lawcruncher]

Well, whenever you give away property there is always a potential downside in that there may come a point when you wish you had it. It can be tempting to give away property to save tax but you should not let the tax tail wag the everything else dog.

[Madmax86]

Yes exactly. Just trying to piece together all the potential downsides so I can weigh up if it's worth doing or not.

If I go ahead, will need to make sure I'm on my best behaviour during my marriage