Posted by Simon Misiewicz on 1st March 2014
Are you pained to be paying more tax on your property income than your spouse?
Do you feel ill for having a good job when you pay so much tax as a high tax rate earner?
In this series of articles we are going to focus on “Deed of trust”
- Deed of trust to minimise your tax – Part 1 Income Tax
- Deed of trust to minimise your tax – Part 2 Capital Gains Tax
- Deed of trust to minimise your tax – Part 3 Inheritance tax
Properties may have been put into a deed of trust to help minimise the income tax for one part in a family. However CGT still applies to the trust if the sold property is sold.
Capital Gains Tax is a tax on the gain in value of assets such as shares, land or buildings that you own. You’ll normally only have to pay Capital Gains Tax when you sell, give away or otherwise ‘dispose’ of an asset that has increased in value since you got it. You only pay Capital Gains Tax when the overall chargeable gains for the tax year are above a certain level called the ‘annual exempt amount’ (1).
When you sell a property you will have a gain. In this example John sells a property for £100,000. He purchased the property a year ago for £60,000. He has therefore made a profit of £40,000 and there are no relief to be accounted for.
If John had the asset in his tax as a high tax earner the following would apply:- (2)
£40,000 profit on sale
(£10,900) CGT allowance
£29,100 taxable profit after the allowance
£8,148 Capital Gain Tax at 28%
If the property was in trust to his wife who was not working she would be taxed as follows:- (3)
£40,000 profit on sale
(£5,450) CGT allowance – this is less than personal allowance
£34,550 taxable profit after the allowance
£9,674 Capital Gain Tax at 28%
As you can see that the amount of CGT is higher when put into a trust than if you held it in your own name.
From the previous example John would have paid less tax if the property was in his own name rather than putting it into trust. You will need to consider what your strategies are for property investing. If you are going to rent the property for a long period and the income tax is set to be 40-45% then a deed of trust is the right strategy but this needs to be compared to the additional Capital Gains Tax if the property was disposed of.
Always plan your strategy before buying properties. If you know that you are going to set up the property into a trust then be sure to buy the property “tenants in common” and get the deed set up soon after purchase. Or better still at the same time.
Here are some other points, previously stated but as a reminder.
- The property is bought in joint names under “tenants in common”
- A deed of trust is formed to allocate the money in accordance of the split you desire
- Complete Form 17 to notify HMRC that the income is to be split (8)
Check to see if there is any Capital Gains Tax to be paid when transferring an asset into a trust. Please note that CGT does not arise if assets are transferred between couples who have lived with one another during the tax year of transfer.
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