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.
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.
- Some expenditure never qualifies for any tax relief
- Some expenditure is only allowable against the gain when you sell the property
- Some expenditure may be deducted from rental income in calculating taxable income.
- Some expenditure may not be claimed as a deduction but is subject to special rules.
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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.
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.
Form 17
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.
A declaration of trust does not need to be registered with HMRC. However, it is important to note that a declaration of trust is a legal document that outlines the ownership and distribution of property between multiple parties. While it does not need to be registered with HMRC, it is advisable to seek legal advice to ensure that the declaration of trust is properly drafted and executed to protect the interests of all parties involved.
The cost of a declaration of trust can vary depending on various factors. Here are some key points to consider:
- The cost of a declaration of trust can depend on the complexity of your situation and the specific requirements of the trust.
- It is advisable to seek professional advice from a solicitor or a specialist in trust law to draft a declaration of trust tailored to your needs.
- Solicitors’ fees for drafting a declaration of trust can vary, and it is recommended to obtain quotes from different professionals to compare costs.
- The fees for a declaration of trust may also depend on the value of the property involved and the extent of legal work required.
- It is important to note that the cost of a declaration of trust is a one-time expense, but ongoing administration and management of the trust may incur additional fees.
To get an accurate estimate of the cost of a declaration of trust for your specific circumstances, it is best to consult with a solicitor who specializes in trust law. They will be able to provide you with personalised advice and a breakdown of the associated costs.
A deed of trust, also known as a declaration of trust, is a legal document that outlines the ownership and distribution of a property’s beneficial interest among multiple parties.
- Purpose: A deed of trust is used when multiple individuals own a property together, such as friends, family members, or business partners. It clarifies each party’s share of ownership and their rights and responsibilities.
- Beneficial Interest: The deed of trust specifies the percentage or proportion of the property’s beneficial interest that each party holds. This may differ from the legal ownership, which is recorded in the property’s title deeds.
- Distribution of Proceeds: In the event of a sale or transfer of the property, the deed of trust determines how the proceeds will be distributed among the parties based on their beneficial interest.
- Tax Considerations: A deed of trust can have implications for tax purposes, such as income tax or capital gains tax or stamp duty land tax. It’s important to seek professional advice to understand the tax implications specific to your situation.
- Legal Advice: Creating a deed of trust is a legally binding process, and it’s advisable to consult with a solicitor or legal professional experienced in property law to ensure the document accurately reflects your intentions and protects your interests.
