Declaration of trust
Will a transfer of beneficial interest in a property using a declaration of trust save tax?
Many investors start out by buying rental property in joint names with their spouse. In such situations where one is a higher rate taxpayer and the other a lower rate taxpayer, the best outcome from a tax point of view is to have the rental income taxed on the lower earning spouse.
By doing this the effective tax rate is kept at 20% and full tax relief can be obtained on mortgage interest payments.
In order to do this a declaration of trust can be used to apportion the ownership accordingly.
To implement this here is what we suggest are the steps you need to take.
1. If there is a mortgage lender in place check your terms and conditions and ensure that there is no restriction to your varying the percentage of ownership. For most jointly owned property the lender should be fine with this.
2. Get the declaration of trust drawn up by your solicitor or a suitably qualified adviser.
3. Remember to change the tenancy from joint tenants to tenants in common.
4. File the declaration of trust together with form 17 to HMRC within 60 days of the date of the trust.
What is a Declaration of Trust?
A Declaration of Trust is a legal document that records the financial arrangements and intentions of property owners, such as ownership amounts, or anyone making a financial contribution towards the property, removing any uncertainty and reducing the chance of disagreements in the future.
Joint Tenants or Tenants in Common
There are two ways to jointly own a property; joint tenants or tenants in common.
Joint tenants have equal rights to the whole of the property. On the death of one owner, their share automatically passes to the surviving owner and not under the will or intestacy of the deceased. Married couples, or those in a civil partnership who do not have children from other relationships, commonly use this method of co-ownership because the right of survivorship makes it straightforward to inherit each other’s share in the property.
As tenants in common, you can own different shares of the property either equally or unequally. If one of the owners dies, then their share does not automatically pass to the surviving owner, but to the beneficiaries in the deceased’s will or intestacy.
Holding the property as tenants in common may be appropriate if for example, there are children from previous relationships, unequal contributions to the purchase price or mortgage payments, or a third party has lent or given money.
If you need a Declaration of Trust, then the property must be held as tenants in common. It does not matter if the property is currently held as joint tenants. Changing the tenancy into tenants in common is relatively straightforward.
HMRC require that any change in ownership by married couples other than 50:50 be notified to them by filing form 17. If you do not file form 17 then HMRC will not accept the change in beneficial ownership until you do file the form. You have 60 days from the date of the declaration of trust to file form 17.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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