If you are in the process of creating a deed of trust then you will want to know more about just what this entails, the potential tax benefits and who you need to consult in the process of creating this document. In this detailed guide, we’ll cover everything you need to learn about creating a declaration of trust as explained by our property tax accountants.
A declaration of trust (DOT or Deed of Trust) is a legally binding document that states the division of ownership of property. It enables the beneficial interest to be assigned to a different person other than the legal owner. By using a DOT, income can be diverted from the legal owner to the person named on the DOT, which can be beneficial where there is a tax advantage to be gained. A DOT can also be used to alter the percentage of ownership from 50/50 to unequal shares between spouses and this can also be beneficial when one spouse is a basic rate taxpayer and the other a higher rate taxpayer.
For many landlords, the introduction of mortgage interest relief restrictions has resulted in higher rate taxpayers being considerably worse off. By restructuring the beneficial ownership of their portfolio income can be assessed on a lower rate taxpayer and thereby continue to receive a substantial benefit from full tax relief on finance costs. A relatively cheap and easy way to do this is by using a DOT. Full use can be made of spousal basic rate tax bands meaning the overall tax bill can be considerably lowered.
This also applies to Capital Gains Tax once a property is sold. So for example Mr & Mrs Jones jointly own 5 rental properties. Mr Jones is a higher rate taxpayer and Mrs Jones is a lower rate taxpayer. If they do nothing Mr Jones will now be worse off as a result of the section 24 interest restrictions. By using a DOT to give the beneficial interest to Mrs Jones all the income can be taxed on her as a lower rate taxpayer and a resulting saving of tax.
Usually, transferring the property income to a spouse would be the most tax-efficient option, since Capital Gains Tax is not payable on spousal transfers of property. Other options would be family members, friends or business partners. However, the objective is to transfer this to a person who is unaffected by Section 24 and to make use of their Basic Rate tax bracket.
Usually, you do not need to consult your mortgage provider when implementing a DOT, however, as lenders have different approaches to the concept of a DOT, care needs to be taken to review any lender’s terms and conditions and we advise that you comply with these. In my experience lenders are not interested as there has been no change in the legal title so their security is unaffected and will therefore have no objection.
If the transfer made is between spouses, HMRC must be informed of a change in the beneficial ownership and you should ensure that the property ownership is on a tenants in common basis and not as joint tenants. HMRC is informed by way of form 17, this is required to be submitted to HMRC within 60 days of the change in beneficial interest.
A deed of trust is a legal document and there are tax implications for implementing these. The two key taxes to consider when implementing a DOT are:
Whenever a person makes a capital disposal, CGT is usually payable. A capital disposal is when a property is either sold or transferred to another legal person. However, there is no CGT due on transfers of capital assets between spouses as these are treated as being on a “nil gain nil loss” basis. This applies to both legal and beneficial transfers.
Assuming no other Capital Disposals have been made during the tax year, each individual is also entitled to the Capital Gains Tax allowance of £12,300 per annum meaning only gains above this, are taxable.
When a property is transferred from one legal person to another, the value of any mortgage at the time of the transfer is also deemed to transfer, as well as the property itself. The mortgage amount is therefore the deemed consideration.
For example, a married couple wishes to transfer 100% of the beneficial interest in a property currently held in joint names on which there is a mortgage outstanding of £300,000 to the husband. The deemed mortgage transfer in this case would be £150,000. The SDLT (2022) would be Nil on the first £125,000 and 2% on £25,000 = £500.
If the mortgage being transferred is more than £40,000, this is chargeable to SDLT at the current SDLT rates. SDLT is also chargeable between transfers made between spouses, but the 3 % higher rate charge is specifically exempt in transfers between spouses.
Yes, you can amend the beneficial interest (assuming you have permission from both parties) as many times as you wish.
If you are a landlord that needs more advice on this topic yet then please feel free to get in touch on 0800 907 8633, via enquiries@uklandlordtax.co.uk or via our online contact form to speak to one of our specialist tax advisors.
If you found this article informative then why not read our guide to capital gains tax in the UK or our article about buying property as a limited company next?
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