Ask Ban Tacs Question
In august API page 91 you mention mortgage trust as a way to protect available equity. Is it a normal discretionary trust with some extra provisions in it and if yes what are the extra clauses? Can one mortgage trust protect equity in a number of properties? Please provide more info so I can establish such a trust.
regards
peter drewniak
Answer
The idea is that you set up a simple trust then, in a round robin of cheques in your bank manager’s office, you borrow sufficient funds to gift to that trust the value of all the equity available in the property you wish to protect. The mortgage trust then takes a second mortgage (assuming your bank already has the first mortgage) on your rental property as security for the loan and lends you back the amount you gifted to it. You use this money to pay back your bank manager for covering the original amount you gifted to the trust.
As the property goes up in value, the mortgage will have to be increased by the same round robin of cheques in the bank manager’s office.
This arrangement is not going to help you if you are already or will soon be, in trouble financially. Further, subsequent transactions to increase the value of the mortgage may expose the whole amount of the mortgage to creditors because the bankruptcy trustee can claw back transactions made before bankruptcy. So each time you increase the mortgage, talk with your solicitor about whether you are solvent at the time.
There is no need for the mortgage trust to charge you interest and, as a result, there is no need for the trust to lodge a tax return. AS there are no tax consequences of this arrangement there is no need to consider whether Part IVA would catch it
The main clause you need to be worried about is not in the trust deed but in the mortgage arrangement and a solicitor should be used to put this in place. You could use one trust on multiple properties but trust deeds are relatively cheap.
