Relevant to the tax year 2017-18
By Louise Misiewicz
Are you married/in a civil partnership? Do you own property investments between you? Is one person a higher rate and the other a basic rate taxpayer?
If the answer to the above questions was yes, you may already be aware that you could be better off splitting your property profits in favour of the lower rate taxpayer, particularly as it’s been discussed a lot recently as a way of countering the effect of the cuts to mortgage interest relief in last year’s budget.
But did you also know that irrespective of legal ownership, HMRC will always assume spouses own a 50/50 share in all property unless you tell them otherwise?
What is a deed of trust?
A deed of trust is a legal document that dictates the capital and revenue interests in a property. Typically couples own property as “joint tenants“, which means that the property is owned 50%/50%. The other way to own property is as “tenants in common“, which specifies a different split in ownership and profits, meaning one person can have 99% of the income and the other person receives just 1%.
What are the benefits of a deed of trust?
Splitting property profits 50/50 has a negative tax implication on couples where one partner is a higher rate taxpayer and one a basic rate taxpayer — they could pay less tax overall if all of the property income was included on the lower taxpayer’s income.
A deed of trust is, in effect, a way of making this happen. It is a legal document drafted by a solicitor that allows you to alter the shares in a property so that a lower taxpaying spouse can be classed as the one benefiting from the rental income.
If you are selling a property then you may be liable to Capital Gains Tax (CGT). As we explained in more detail in a previous article each person receives an annual CGT allowance of £11,300 before any tax ia paid. If a couple own a property and it is sold then the first £22,600 is tax free. After that the gain is taxed on investment property at 18% for basic rate tax payers and 28% for high rate tax payers.
A deed of trust may also be used to minimise CGT liabilities as you can utilise one another’s CGT annual allowances. Not only that but if done correctly you can identify the right % allocation to maximise the basic rate tax band for CGT purposes too. This is more significant if you are married and a property is in just one person’s name.
We have helped by property investors to minimise the impact of CGT using a deed of trust for many years.
So, what is new?
It was not until my tax team spoke about this with HMRC at length that we discovered that the deed of trust and form 17 needs to be accompanied for:
- Properties already purchased in joint names
- Properties couples buy in future under a ‘tenants in common’ structure where ownership is not 50/50
This means that every property owned by a couple will be deemed to be owned 50/50 unless you tell HMRC otherwise. Even if you buy a property as tenants in common with an split of 99/1 in favour of the lower rate taxpayer, apportioning the profits in the same way could mean there is a potential risk that your self assessment return may be challenged. This is because although you bought the property in the correct way, you failed to notify HMRC.
If the couple divorce then the assets will remain 50/50 until the divorce settlement has been finalised.
Step by step guide to implement this strategy
It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:
1 – Identify whether you’d pay less tax by changing the ownership between a higher and lower rate taxpayer
2 – If so, speak with your solicitor and get them to do a deed of trust specifying how you want the income to be split
3 – Complete a Form 17 to inform HMRC of the deed of trust
4 – Send the form 17 with a copy of the deed of trust to:
HM Revenue and Customs
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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