Raising Money to Pay a Tax Bill: Why Lenders Say No, and How a Second Charge Can Help

Owing HMRC a large sum is stressful enough. Finding out that the obvious solution, raising money against a property you own, is closed to you can make it worse.

Many homeowners and landlords are surprised to learn that most mainstream lenders, including many specialist buy-to-let and holiday let lenders, will not allow capital raising where the money is going to pay a tax bill.

This article explains why lenders take that view, what HMRC can do if a tax debt stays unpaid, and why a second charge is often the route that actually works.

Why Lenders Say No to Tax Bills

When you remortgage and raise extra money, the lender asks what the funds are for.

Home improvements, buying another property or consolidating debts are usually fine. A tax bill is a different matter. Some building societies state plainly in their criteria that capital raising to pay tax is not acceptable, and many more apply the same rule in underwriting even if it is not published.

There are a few reasons behind this:

• A tax debt can suggest income has been under pressure, which raises questions about affordability going forward.
• Tax liabilities often recur. A lender may worry that next year’s bill will arrive with no savings set aside for it.
• HMRC is a powerful creditor with strong enforcement tools, so an unpaid balance is seen as a live risk to the borrower’s finances.
• Mainstream lenders price their products for straightforward cases. Anything that needs a closer look tends to fall outside their appetite.

This applies across residential, buy-to-let and holiday let mortgages. A client can fit a lender’s criteria perfectly on property, income and credit, and still be declined purely because of what the money is for.

What Happens if the Tax Stays Unpaid

HMRC usually starts by getting in touch and will often agree a Time to Pay arrangement, spreading the bill over monthly instalments.

Self assessment customers can set up a plan online for smaller debts, currently up to £30,000, and larger balances can be negotiated directly.

If an arrangement is not agreed or not kept to, HMRC can and will escalate.

In England and Wales it can serve a statutory demand and then petition for bankruptcy on debts of £5,000 or more. In Scotland the equivalent process is sequestration. HMRC generally treats this as a last resort, but it does use it, and a bankruptcy order can put property, including a let property, in the hands of a trustee.

That is why timing matters. The longer a tax debt is left, the fewer options remain.

Why a Second Charge Often Works

A second charge is a loan secured on a property behind the existing mortgage. In Scotland it is known as a second-ranking standard security. Your first mortgage stays exactly as it is, and the second lender takes security in second place.

For tax bills, second charges have some clear advantages:

• Purpose. Specialist second charge lenders take a broader view of loan purpose and several will lend specifically to settle an HMRC liability.
• Your existing mortgage is untouched. If you are part way through a fixed rate, you avoid early repayment charges and keep your current rate.
• Rental income can count. On a buy-to-let or holiday let, affordability can be assessed on the property’s rental income.
• Speed. Second charge lenders are used to time-sensitive cases and can often move quickly once the paperwork is in place.
• Flexibility on circumstances. Lenders in this market are used to looking at the full picture rather than ticking boxes.

A Two-Stage Approach

A second charge does not have to be permanent. Where the longer-term aim is a single, competitively priced mortgage, a sensible plan can be:

• Stage one: take a second charge with no early repayment charges to settle HMRC in full and remove the enforcement risk.
• Stage two: once the tax is paid, remortgage both the first and second charges into one mortgage. The purpose at that point is repaying existing secured borrowing, which many lenders accept, and the full history is disclosed to the new lender.

Choosing a penalty-free second charge at stage one is what keeps stage two open without extra cost.

Things to Weigh Up

A second charge is not the right answer for everyone, and it is important to go in with your eyes open:

• Rates on second charges are usually higher than on first mortgages, and there may be broker and lender fees.
• You are turning an unsecured tax debt into a debt secured on your property. If you do not keep up repayments, the property may be repossessed.
• If a Time to Pay arrangement with HMRC is realistic and affordable, it may be cheaper. Speak to your accountant before committing.
• Think ahead to next year’s tax bill so the same problem does not repeat.

A Real Example

We recently helped a client who owned a holiday let in Scotland worth around £260,000, with a £90,000 residential mortgage running under consent to let. He owed HMRC £70,000 and they were pressing for payment. A well-known building society declined a holiday let remortgage with capital raising purely because of the tax bill. A penalty-free second charge, assessed on the rental income, settled HMRC in full, and the plan is now to remortgage both charges onto a single holiday let mortgage at around 62% loan to value.