Property trusts serve as powerful vehicles for asset protection, inheritance planning, and tax efficiency in the UK. However, when trustees need rapid access to capital for property transactions, traditional mortgage routes often prove too slow or unsuitable. This is where bridging finance becomes invaluable, offering the speed and flexibility that trust property transactions frequently require.
United Trust Bank’s Bridging Department has considerable experience of lending to trusts. Although typically there will be additional hoops for lender and borrower alike to jump through, loans to trust structures are not necessarily as problematic as the parties often envisage. The key lies in understanding the legal framework, regulatory requirements, and practical considerations that govern this specialised area of finance.
Understanding Property Trusts and Ownership Structures
A trust represents an arrangement which enables an individual or a company, the trustee, to hold certain assets on behalf of another individual or group of persons, known as the beneficiary. Unlike companies, trusts are not separate legal entities but rather legal relationships between trustees and beneficiaries.
In the UK, there are several common types of trusts used for property ownership, each serving different purposes and offering varying levels of flexibility. Bare trusts represent the simplest structure and give all assets to the beneficiary as long as they’re 18 years old or over in England and Wales. While assets in a bare trust are held in the name of a trustee, the beneficiary has the right to the contents of the trust at any time if they’re 18 years old or over, making this structure particularly suitable for straightforward inheritance planning or holding property for young people until they reach majority.
Discretionary trusts provide trustees with broad discretion over how and when to distribute trust assets among beneficiaries, offering maximum flexibility but also carrying greater responsibility. This structure is particularly valuable for complex family situations where beneficiaries’ needs may change over time or where tax planning considerations require sophisticated asset management strategies.
Life interest trusts grant specific beneficiaries the right to income from trust assets during their lifetime, with the capital typically passing to other beneficiaries upon death. This structure is commonly used in second marriage situations or where the settlor wants to provide income security for one person while preserving capital for future generations. The beneficiary can get income from the trust straight away but cannot control the assets that provide the income, creating a balance between current needs and future preservation.
Property is commonly held in trust for various strategic reasons, including inheritance tax planning, asset protection from creditors, family estate planning, and providing for vulnerable beneficiaries who may lack capacity to manage property directly.
Can a Trust Get a Bridging Loan in the UK?
The straightforward answer is yes, but with important caveats. Technically loans are made to the trustees rather than the trust itself, as trusts are not separate legal entities.
Trustees can apply for bridging loans on behalf of a trust under several conditions. Most importantly, the trust deed must explicitly permit borrowing and detail the circumstances under which trustees can enter into a mortgage agreement. The lender will also expect to see evidence in the trust deed that the trustee is permitted to apply for loans on behalf of the trust and that the trust has the requisite power to borrow and to charge its assets.
‘Know Your Client’ will be required on all trustees and beneficiaries and, where corporate trustees are involved, on their directors, together with constitutional and regulatory documents. This enhanced due diligence process recognises the additional complexity of trust structures while ensuring compliance with anti-money laundering regulations.
Common scenarios where trust bridging loans prove valuable include purchasing property at auction where speed is essential, refinancing existing trust properties to release equity, settling inheritance tax liabilities when cash flow is tight, funding refurbishment or development projects, and bridging the gap between property sales and purchases within a trust portfolio.
Legal Considerations Before Applying
Before pursuing bridging finance, trustees must conduct a comprehensive review of their legal position and obligations. The starting point is always the trust deed itself, which serves as the cornerstone of any property trust. It outlines the terms and conditions under which the trust operates, including the powers and responsibilities of the trustees. When it comes to securing a mortgage for a property held in trust, the trust deed plays a pivotal role. Trustees must verify that borrowing is explicitly permitted and understand any limitations or conditions that apply to such financial arrangements.
Many trust deeds contain specific limitations on borrowing that could significantly impact the scope and terms of any bridging loan. These could include caps on the amount that can be borrowed, conditions under which the property can be used as collateral, or stipulations regarding repayment terms. Understanding these limitations is essential for trustees to avoid potential breaches of the trust deed, which could have serious legal and financial repercussions for both the trustees personally and the trust beneficiaries.
The fundamental principle governing all trustee actions is that they must act within their powers and in the beneficiaries’ best interests. All powers of a trustee are fiduciary, meaning they must be exercised for the benefit of the trust and its beneficiaries, not for personal gain. This fiduciary duty extends to borrowing decisions, requiring trustees to demonstrate that taking on debt serves the trust’s purposes and represents prudent financial management. The Trustee Act 2000 creates a new statutory duty of care for trustees in carrying out their powers, imposing a requirement to exercise such skill and care as is reasonable in all circumstances.
Depending on the trust structure and specific circumstances, trustees may need to obtain beneficiary consent before borrowing. This is particularly relevant where beneficiaries have specific rights under the trust deed or where the proposed borrowing could affect their interests. The Trust Deed may require consultation with any beneficiary who is of full age and entitled to an interest in possession in the land, though this duty can be excluded by the deed itself while accountability to the beneficiary remains.
When a trust holds residential property that could be occupied by beneficiaries, the Financial Conduct Authority regulations become particularly relevant. Under FCA rules, a loan to a trustee acting for a large commercial company is a regulated mortgage contract, bringing additional consumer protection requirements but also more stringent criteria and limitations.
Benefits of Bridging Finance for Trust-Held Properties
Bridging loans offer several compelling advantages for trust property transactions, particularly where speed and flexibility are paramount. One of the most significant benefits is the rapid access to capital that these financing solutions provide.
The flexibility that bridging loans provide in terms of property types represents another major advantage for trust portfolios. Unlike traditional mortgages, bridging loans can be secured against various property types within a trust portfolio, including residential properties, commercial premises, development land, and even unmortgageable properties requiring renovation. This allows trustees to leverage the full range of trust assets when seeking financing, rather than being constrained by the limited property types that conventional lenders typically accept.
Bridging finance can prevent trustees from being forced into disadvantageous property sales due to timing constraints, a situation that often arises during estate administration or when market conditions are unfavourable. Preservation of asset value is particularly valuable during estate administration or when awaiting planning permissions that could significantly increase property values. Rather than accepting below-market offers due to urgency, trustees can use bridging finance to maintain their position until optimal selling conditions emerge.
For estate planning purposes, bridging loans can facilitate tax-efficient restructuring of trust assets. When setting up a property trust in the UK, one of the key financial considerations is the potential for inheritance tax savings. Property placed in a trust can sometimes be excluded from the estate for inheritance tax purposes, depending on the type of trust and how it is structured. Bridging finance can support these strategies by providing temporary funding during restructuring processes, allowing trustees to purchase additional properties during advantageous market conditions while maintaining existing holdings for long-term capital growth.
Trustees can also use bridging loans to unlock equity from existing properties for development projects or to refinance multiple properties within the trust portfolio more advantageously. This approach enables trustees to maximize the productive use of trust assets, whether through property improvements that increase rental yields, development projects that create additional value, or refinancing arrangements that reduce overall borrowing costs and improve cash flow management.
Common Challenges and How to Overcome Them
While bridging loans for trust properties offer significant benefits, several challenges commonly arise during the application and completion process that require careful navigation and expert guidance. The complexity of documentation represents one of the most significant hurdles, as trust lending requires extensive documentation beyond standard bridging loan requirements. Working with experienced solicitors who specialise in both trust law and property finance can streamline this process significantly, ensuring that all necessary documentation is prepared correctly from the outset and reducing the likelihood of delays or requests for additional information.
The enhanced due diligence requirements for trust lending can extend approval timeframes, potentially conflicting with urgent financing needs. Along with the usual due diligence that applies to all short term bridging loans such as why is the loan required, what is the security and how will the loan be repaid, there are additional points that need to be addressed when lending to a trust. Lenders must conduct thorough ‘Know Your Client’ procedures on all trustees and beneficiaries, and where corporate trustees are involved, on their directors, together with constitutional and regulatory documents.
Not all bridging loan providers have experience with trust structures, which limits options and can potentially affect rates and terms available to trustees. Specialist brokers with established relationships with trust-experienced lenders can provide access to more competitive options and ensure that trustees are presented with financing solutions that are appropriately structured for their specific circumstances.
Older trust deeds may contain unclear or outdated language regarding borrowing powers, creating uncertainty about trustee authorities and potentially requiring legal clarification or deed variations. These ambiguities can delay the lending process while legal opinions are obtained or, in some cases, may require court applications to clarify or extend trustee powers. Early identification of potential issues through professional legal review can help trustees address these challenges proactively.
The personal liability that trustees face under English law represents another significant concern that must be carefully managed. Under English law that trustee is personally liable for those obligations, which naturally raises questions about why anyone would accept such responsibility. However, provided the trustee has acted in accordance with the powers set out in the trust documents and has not incurred the liability through misconduct, the trustee will be entitled to be indemnified for that personal liability out of the trust assets. Understanding this liability framework and ensuring adequate indemnity provisions is crucial for protecting trustees while enabling them to fulfill their duties effectively.
Documents Needed to Apply for a Bridging Loan as a Trust
Successful trust bridging loan applications require comprehensive documentation that satisfies both standard lending criteria and trust-specific requirements. The foundation of any application rests on essential trust documentation, which must include a certified copy of the complete trust deed, including any amendments or variations that have been made since its original creation. Trustees must also provide current trustee appointment certificates or court orders confirming their authority to act, along with trust registration details where applicable, particularly for trusts that must register with HMRC. A formal trustee resolution authorising the loan application and the creation of any property charge is essential to demonstrate that the borrowing decision has been properly made in accordance with the trust’s governance requirements.
Comprehensive trustee identification represents another crucial component of the documentation package. This includes photo identification for all current trustees, proof of address dated within three months, and for corporate trustees, company incorporation documents, current directors’ details, and ultimate beneficial ownership information to satisfy anti-money laundering requirements. The lender will need to understand the complete ownership and control structure of the trust to ensure compliance with regulatory requirements.
Property documentation must be thorough and current, including official copies of title registers from Land Registry, recent property valuations which may be arranged by the lender if required, property insurance certificates demonstrating adequate coverage, any existing mortgage or charge documentation, and planning permissions or building regulation approvals where relevant to the property’s current use or intended development. Financial information requirements extend beyond simple bank statements to include trust accounts for the previous two years where available, detailed analysis of trust income and expenditure patterns, bank statements for all trust accounts, and clear evidence of deposit funds and their legitimate source.
Perhaps most critically, trustees must provide robust evidence supporting their chosen exit strategy. For refinancing exits, this means demonstrating the ability to obtain long-term financing when the bridging loan matures. For sale exits, trustees should provide recent comparable property sales data and a realistic marketing strategy. Development exits require detailed project costings and credible sales projections, while all exit strategies should be supported by professional valuations that substantiate the anticipated exit value. The quality and completeness of this documentation significantly impact both approval speed and the terms offered, making it essential to work with solicitors experienced in trust lending who can ensure that all requirements are met comprehensively from the outset.
Regulatory Compliance and Risk Management
Trust bridging loans operate within a complex regulatory framework that varies depending on the property type, intended use, and trust structure. Understanding these regulations is crucial for ensuring compliance and managing risk effectively.
For residential properties where beneficiaries may live, loans are likely to be regulated by the Financial Conduct Authority. The condition set out in PERG 4.4.1G (1) limits the range of borrowers to whom the protections of the mortgage regulation regime apply to individuals and trustees.
For a bridging loan which is an interest-only mortgage, acceptance by a mortgage lender as a repayment strategy for the purposes of MCOB 11.6.41R (1) of an expectation that, by entering into the bridging loan, the customer’s credit status will be sufficiently improved to enable him to refinance to a longer-term regulated mortgage contract (except where the mortgage lender has evidence of a guaranteed offer for such a longer-term contract) may be relied upon as tending to show contravention of that rule.
For commercial or investment properties, loans typically fall under unregulated lending, providing greater flexibility but requiring trustees to exercise enhanced due diligence when selecting lenders and negotiating terms.
Risk management for trustees extends beyond regulatory compliance. Personal liability issues require careful consideration, and trustees should ensure they understand their indemnity rights and the extent of trust assets available to meet any obligations. Professional indemnity insurance may provide additional protection, particularly for professional trustees.
Exit Strategies and Repayment Planning
Successful bridging finance requires clear, realistic exit strategies that lenders can underwrite with confidence, and for trust properties, exit planning must consider both the immediate financing requirements and the long-term objectives of the trust. Refinancing exits represent one of the most common approaches, where trust bridging loans are repaid through refinancing with long-term mortgages or trust-specific financing products. This strategy requires demonstrating that such refinancing will be available when the bridging loan matures, taking into account the trust structure and intended property use. Lenders will want to see evidence of preliminary discussions with long-term lenders or, ideally, agreements in principle that confirm the viability of this exit route.
Property sales provide definitive exit strategies but require realistic valuations and achievable timescales that account for the complexities of trust property transactions. For trust properties, sales may require beneficiary consents or court approvals, which must be factored into the timeline and demonstrated to the bridging lender as part of the application process. The trust deed may impose specific requirements for property disposals that could affect timing or achievable sale prices, making it essential to understand these constraints when developing the exit strategy.
Where bridging finance funds property improvements or development projects, exit strategies typically involve either sale at enhanced values or refinancing based on improved property valuations. These development and enhancement exits require detailed project plans, realistic cost schedules, and professional valuations that demonstrate the anticipated uplift in property value. Lenders will scrutinize development timelines, contractor credentials, and market demand for the improved property to ensure that the exit strategy is both technically and commercially viable.
Some trust bridging loans facilitate broader portfolio restructuring, with repayment coming from the disposal or refinancing of other trust assets rather than the specific property being charged. These complex strategies require sophisticated financial planning and legal advice to ensure that the proposed asset movements are permissible under the trust deed and beneficial to the overall trust objectives. Such arrangements might involve the sale of investments, the disposal of other properties, or the reorganization of the trust’s capital structure to generate the necessary repayment funds.
Conclusion
Bridging loans represent a valuable financing tool for trustees managing property portfolios, offering the speed and flexibility that trust property transactions often require. While the legal and regulatory framework adds complexity compared to standard property lending, experienced specialists can navigate these requirements effectively. As the bridging finance market continues to evolve, trustees have access to increasingly sophisticated products and services designed specifically for trust property requirements.
By working with specialist advisers and experienced lenders like Rapid Bridging, they can access the capital they need while fulfilling their fiduciary duties effectively. For trustees considering bridging finance, with proper preparation, legal guidance, and the right lending partner, trust property bridging loans can provide powerful solutions to complex financing challenges while protecting the long-term interests of all beneficiaries.
