Settling an HMRC Liability on a New Holiday Let: The Case for a Second Charge Bridge

The Client

Our client owns a property in Scotland which he has recently started letting as a holiday let. He originally bought it as his home with a residential mortgage from a high street bank, and when he moved out he obtained his lender’s consent to let.

The property is valued at around £400,000 and the outstanding balance is around £120,000, a loan to value of roughly 30%.

He has lived in rented accommodation for the past four years. Apart from the issue below, his credit record is clean.

The Objective

The client owed £70,000 to HMRC.

HMRC had allowed time to pay, but they were now actively chasing for settlement. Left unpaid, a tax debt of this size can lead HMRC to petition for sequestration, the Scottish equivalent of bankruptcy.

He needed two things:

• Short term, to raise £70,000 against the property quickly and settle HMRC in full.
• Longer term, to move all the borrowing onto a proper holiday let mortgage rather than a residential loan running under consent to let.

The Complication

Two things stood in the way.

First, the existing lender had agreed to the property being let but was not a holiday let lender, and many mainstream lenders will not release equity where the purpose is to pay tax arrears. Second, the property had only been let for part of a single season.

Holiday let income is seasonal, so a short track record shows only a fraction of what the property can earn over a full year.

How We Assessed Options

We looked at three routes, in the order a client would naturally expect.

Step 1 – Holiday Let Remortgage with Capital Raising

The property fitted the holiday let criteria of a well-known building society, so we approached it about a remortgage raising the full £70,000. It confirmed this was not available: its policy does not allow capital raising to settle a tax liability.

Step 2 – Second Charge

A second charge, known in Scotland as a second-ranking standard security, was the natural next step. Several second charge lenders will lend to clear an HMRC liability, and with combined borrowing of around £190,000 against a £400,000 property, the equity was not in question.

The problem was affordability.

On a let property, second charge lenders assess the loan against rental income, and for a holiday let the lenders available would only use confirmed, actual income rather than a letting agent’s projection. With only part of one season’s bookings on record, the confirmed figure fell well short of what was needed to support a £70,000 term loan. This was ruled out for now.

Identifying the Right Route

This is exactly the situation a second charge bridge is designed for.

A bridging loan is assessed mainly on the equity in the property and a credible plan to repay it, known as the exit, rather than on monthly affordability.

We identified it as the right route because:

• the purpose, settling HMRC, was acceptable to bridging lenders;
• there was ample equity, with combined borrowing of around half the property’s value;
• the interest could be retained within the loan, so no monthly payments were needed while the letting history built up;
• the existing first charge stayed in place, untouched;
• there was a clear, realistic exit: a holiday let remortgage, with a lender happy to use a letting agent’s projection letter rather than a long trading history.

As the property is not the client’s home, the bridge was arranged on an unregulated basis. The loan was sized so that, after retained interest and fees, the full £70,000 was available to pay HMRC.

Referral to Specialist Master Broker

Drake refers second charge bridging business to a specialist master broker.

With the client’s permission, we passed the case across with our full assessment and a documented exit plan.

Fewer bridging lenders operate in Scotland than in England and Wales, so specialist market access mattered. The master broker sourced a lender lending on Scottish property that was comfortable with the purpose, the second-ranking security and the exit.

The Exit Plan

A bridge is only as good as its exit.

Here the primary exit is a remortgage of both the first charge and the bridge into a single holiday let mortgage.

At that point the property will still not have a long letting track record, so we identified a holiday let lender that is happy to assess the income on a projection letter from an experienced holiday letting agent, supported by the bookings achieved so far. The borrowing purpose at that point is repaying existing secured debt, with the full history, including the tax liability, disclosed to the new lender.

As a fallback, the equity in the property means a sale would comfortably repay all borrowing.