posted by Jake Leversuch on 17th April 2015
Is your spouse paying too much tax on their property portfolio?
If the answer is yes, then you may want to consider using a deed of trust to minimise your tax.
If you are a higher rate tax payer (40%+) with a profitable property portfolio then you may be wondering how you can pay as little tax as possible on your profits from your portfolio.
The answer can be fairly simple if you have a spouse that is a lower rate tax payer (20% or below) and has a considerable margin to earn before they reach the £41,786 barrier (3). Any profits made can be transferred into their name using a legal document called a “Deed Of Trust”. This would effectively allow you reduce the amount of profits you pay tax on at 40% and switch it to their name so they only pay 0% or 20% on the same profitable gain.
The solution is simple its called a “Deed Of Trust”. These are legal documents drawn up by a solicitor where the ownership of properties are transferred to another person (your spouse). There are 2 types of ownership legal and beneficial (1).
In simple terms the legal ownership is the ownership of the property itself, the beneficial ownership is the income. A “Deed Of Trust” allows you to transfer just the legal or just the beneficial ownership, or even both if this suits your needs. The same person may be both legal owner and beneficial owner of the property, but there can be a separation of the two (1).
A “Deed Of Trust”, once in place, can be altered at any time for it to continue to fit your needs. Also both types of ownership can be altered in anyway to fit your needs, be that a 50/50, 75/25 or even 100/0% split.
The solicitor we recommend for any deed of trust needs is Villi Chung, the organisation she works for is Tallents Solicitors (2).
Once you have a deed of trust in place you will also need to complete a form 17 that informs HMRC that a deed of trust is in place and that you wish to change how the income is currently treated. The form 17 must be sent to HMRC within 60 days of the deed of trust (6)
Applying the treatment
So lets look at an example of a “Deed Of Trust” in practise and then you can see how this may help you in the future.
If your property portfolio is making a net profit of £20,000 per annum, then you, as a higher rate tax payer would be paying:
£8,000 Tax at 40%
£12,000 Net Gain
However if you have a spouse that is a 20% tax payer, lets say they earn £20,000 from their employment income, then a deed of trust can be drawn up to transfer 100% of the profits (Beneficial ownership) into their name. This would now mean:
£4,000 tax at 20%
£16,000 Net Gain
This equals a tax savings for you as an individual of £4,000.
Process steps to take advantage of this strategy
1 – Identify who is the high rate tax payer
2 – 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
Please note that a deed of trust must be drawn up and in place before any major transactions or profit splits in relation to property they cannot be backdated and cannot be imposed retrospectively for previous tax years.
If you use a deed of trust to someone else than your spouse then you will be liable to Capital Gains Tax (CGT)(4). You will also be potential liable for CGT if you use a deed of trust to a limited company. Additionally if the other person or limited company gives you a financial consideration above £40,000 then you will also need to pay SDLT (5).
Finally I would advise that you speak with your mortgage broker. They will need to check the terms and conditions of the mortgage to ensure that any sort of deed of trust is allowed.
If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing then please book an “Initial Free Consultation” on the below website: http://www.optimiseaccountants.co.uk/event/initial-free-consultation-2/
Next steps to set up the right structure for your property investments
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:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.