Buy to let tax is too high?
If you own a buy to let property and are a high tax earner you could be paying between 40-45% in tax per year. We must also remember that the impact of Section 24 will have an adverse effect on your buy to let tax liability. Our property accountants have written an article on Section 24 for you to understand how it may affect you. A deed of trust may be the most tax efficient document that you can use.
If you put properties into a deed of trust you can then reduce the tax liability from 40-45% to 20% or indeed 0%. Our property accountants have helped literally hundreds of clients save on their buy to let tax through the use of a deed of trust.
How do you reduce your buy to let tax liability?
There are many ways to minimise your tax and they are:
- Using Limited companies to pay just 19% corporation tax. We have written a separate article on the best way to use a limited company as a property investor.
- Using your spouse, family and friends to do some work which then utilises their personal allowance
- Amend the legal documentation when you purchased the property from Joint Tenants to Tenants In Common. This allows you to split the income and ownership of the property
- A deed of trust transferring the money from the property into a trust
So, let us get into the detail
What is a deed of trust and how does it reduce your buy to let tax?
A trust is a legal arrangement where one or more ‘trustees’ are made legally responsible for holding assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more ‘beneficiaries’.
The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into a trust (the ‘settlor’). The settlor’s wishes for the trust are usually written in their will or set out in a legal document called ‘the trust deed.’ (3)
In general law, there are two types of ownership – legal and beneficial. If the legal owner and the beneficial owner are not the same person, the legal owner holds the property on trust for the beneficial owner. Where there is joint ownership of property, there is always a trust (7).
The beneficial owner is the person for whose benefit the property is held. It is distinguished from the person in whose name the property is held (the legal owner). [beneficial ownership] means ownership for your own benefit as opposed to ownership as trustee for another.’ (J Sainsbury plc v O’Connor 64 TC 208)
The beneficial owner is sometimes referred to as having a ‘beneficial interest’ in the property.
A settlor is a person who has put assets into the trust. This is known as ‘settling’ property. Assets are normally put into the trust when it’s created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.
In some trusts, the settlor can also benefit from the assets they’ve put in. These types of trust are known as ‘settlor-interested’ trusts and they have their own tax rules. (3) (4)
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiary, such as a whole family or a defined group of people. Each beneficiary may benefit from the trust in a different way.
For example, a beneficiary may benefit from (1):
- the income only – for example, they might get income from letting a house or flat held in a trust
- the capital only – for example, they might get shares held on trust when they reach a certain age
- both the income and capital of the trust – for example, they might be entitled to the trust income and have a discretionary interest in trust capital
Information that HMRC need about your deed of trust
Once you have a deed of trust set up it is very important that you notify HMRC. The type of information that you will need to supply to HMRC is as follows (1):
- the name of the trust
- the names and addresses of all of the trustees
- the contact details of any professional agent, or a trustee’s telephone number if there is no professional agent
- whether the trust is governed by UK law, Scots law or another country’s law
- is the trust is employment-related
- is the trust is for a vulnerable beneficiary
- details of how the trust was created – for example, this could be the deceased person’s details if the trust is created by a will or a settlor’s details for a trust created during their lifetime
- the date the trust started
- whether the trust was created by a Deed of Variation or family arrangement
To make life a little easier HMRC has designed a form for you to complete your deed of trust. The form 41G may be found on their website. (2)
It is advisable that you speak with your solicitor to see how you can take things forward to put in a deed of trust and to discuss any implications it has on your estate.
Interest in possession trusts
For Income Tax purposes, an ‘interest in possession’ trust is one where the beneficiary is entitled to trust income as it arises.
From an Income Tax perspective, an interest in possession trust is one where the beneficiary has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.
The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. The trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income. However, this will depend on the terms of the trust.
Example of using an in possession trust
Stanley is married to Kathleen. On his death, Stanley’s will creates a trust and all the shares he owned are to be held in that trust. The dividends (income) earned on the shares are to go to Kathleen for the rest of her life. When she dies the shares pass to the children.
Kathleen is the income beneficiary. She has an ‘interest in possession’ in the trust as she is entitled to the dividend income from the trust assets for the rest of her life. Kathleen has no right to the capital. When she dies the trust ceases and all the capital (the shares) passes to the children. (5)
Download your buy to let tax guide here, written by our property accountants
With bare trusts, the beneficiary (the person who benefits from the trust) has an immediate and absolute right to both the capital and income in the trust. Beneficiaries will have to pay Income Tax on income that the trust receives. They might also have to pay Capital Gains Tax and Inheritance Tax. (6)
Gary leaves his sister Juliet some money in his will. The money is to be held in trust. Juliet is the beneficiary and is entitled to the money and any income (such as interest) it earns. She also has a right to take possession of any of the money at any time.
This is a bare trust because Juliet is absolutely entitled to both the capital (the original money put into the trust) and the income (any interest earned).
Tax on Bare Trusts & Interest in possession trusts. (5) (6)
Tax on rental income is the same as income tax rules. At the time of writing, basic tax earners would be taxed at 20% of the income from the deed of trust. The income can be reduced by the following costs:
- Trust management expenses of someone running the trust
- preparing a tax return for income received (this doesn’t cover the cost of preparing capital gains pages – which must be excluded from the expenses claimed)
- deciding which beneficiaries to pay and how much
- paying income to beneficiaries
Example of using a bare trust
A flat is rented out and the rents are paid to A. “A” claims that the rent from the flat should be taxed half and half between A and her husband B. “A” says she has transferred the flat into joint names with B. However, the Land Registry record clearly shows that A is the sole owner. It is also established that she was the sole borrower of the loan from the building society.
There is no evidence that the beneficial ownership of the property or the income is held to any extent by B.
Joint ownership is not in point here. The property is not held ‘in joint names’, so ITA/S836 is not relevant. That section refers to ‘property held in the names of a husband and wife etc’.
A is taxable on all the income. (7)
For the trust to work please ensure that:
- 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)
Precautionary measures of using a deed of trust
Preventing “tax pains” through precautionary methods. Here are a few suggestions.
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).
Please be careful when going to solicitors and asking them to draw up a deed of trust. We have received complaints about solicitors as they did not advise their clients that they needed to send a deed of trust with the form 17 to HMRC. If HMRC do not receive both the form 17 and the deed of trust within 60 days then the whole thing becomes void. Read our article by our property accountants about this.
How can our property accountants help you reduce your buy to let tax?
Book a call to discuss our property accountancy services – Click Here to book
Book a tax call with our property tax specialists using the code “Art25” to get 25% discount – Click Here to book
1. Notifying HMRC About A New Trust
2. Trust Details Form
3. Trusts: The Basics
4. Settlor-Interested Trusts
5. Interest In Possession Trusts
7. HMRC Income Tax Guidance
8. Declaration Of Beneficial Interests – Form 17