What is a UK deed of trust? Our Expert Guide when dealing with property rental income
As property accountants, we are regularly asked about reducing property income tax and property capital gains tax using a declaration of beneficial ownership document. This is often referred to as a property rental income UK deed of trust. This is why we have written this expert guide.
Here are just some of the questions we get asked and cover in this article:
– What is a Deed of Trust (UK)?
– When would you use a Deed of Trust?
– Is a declaration of trust document the same as a deed of trust?
– How do I reduce property income tax using a deed of trust rental income and Form 17?
– What is a Form 17, and when should one be used?
– How do I notify HMRC that I wish to transfer property income to my spouse?
– What are the legal ways to reduce property capital gains tax using a declaration trust document?
– Are there any issues with mortgage lenders when using a deed of trust form 17?
– Will I have to pay Stamp Duty using a deed of trust to transfer property ownership to my spouse?
Although “deed of trust declaration of beneficial ownership” is a mouthful, it is a crucial element of property accountancy which helps reduce property tax for our landlords.
What is a Deed of Trust?
A deed of trust may also be referred to as a declaration of beneficial ownership trust document. It is a legally binding document that dictates a property’s capital and revenue interests. The trust allows landlords to transfer property between spouses to save income tax.
When would you use one?
A Deed of Trust in the UK is typically used in situations where co-ownership of property needs to be clearly documented and legally defined. Common scenarios include:
-Joint Property Ownership: When two or more people purchase a property together but wish to specify different ownership shares or contributions towards the property.
-Unmarried Couples: To establish each partner’s financial interest in a property they own together, as there are no automatic legal protections for unmarried couples in property ownership.
-Tax Planning: For married couples or civil partners who want to redistribute income from jointly owned property to minimize tax liabilities, such as using Form 17 to declare unequal shares for tax purposes.
–Investment Properties: When multiple investors contribute different amounts towards purchasing an investment property and want to clarify their entitlements to income or proceeds from the property.
–Estate Planning: To ensure that property assets are distributed according to the wishes of the owners in the event of death, particularly when the property is held as tenants in common.
In all these situations, a Deed of Trust makes sure everyone knows who owns what and helps avoid disputes by clearly documenting the intentions and obligations of everyone involved.
What are the typical fees for preparing one?
In the UK, the cost of a deed of trust varies but typically ranges from £200 to £500 or more. Costs depend on factors like document complexity, the solicitor chosen, and location. It’s wise to compare quotes from different providers for the best deal.
How long is it valid for?
Once a deed of trust is signed and registered, it stays in effect for as long as the conditions it outlines are relevant. It continues until the property is sold or changes ownership, after which its terms no longer apply.
Does it need to be registered with the land registry?
No, but you can place a note on the property’s Title Deeds to show there’s a declaration of trust between the owners. The Land Registry doesn’t need to see the actual document to record this note.
Can you transfer ownership of a buy-to-let property that has a mortgage?
Where buy to let property is mortgaged, further professional advice may be necessary. A transfer of the beneficial interest may breach the mortgage terms with the lender. A transfer of an interest in land could also trigger a Stamp Duty liability if the sum outstanding is over £125,000.
What should be considered when using conveyancing solicitors?
Care is required when dealing with conveyancing solicitors. They often miscalculate Stamp Duty leading to higher tax payments to HMRC unnecessarily.
This is because they consider the mortgage a form of consideration and charge Stamp Duty banded rates and the 3% Stamp Duty higher rates.
This is incorrect, as Stamp Duty banded rates only need to be charged if the mortgage is transferred. The 3% Stamp Duty higher rate should not be charged at all.
What are the benefits?
Splitting property profits 50/50 has tax benefits for couples. This is where one is a higher rate taxpayer and the other a basic rate taxpayer. They could pay less tax overall if all property income were included in the lower taxpayer’s income. This means that a transfer of property between spouses saves tax.
A deed of trust is 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 a lower taxpaying spouse can be considered the one who is benefiting from the rental income.
Using a deed of trust to transfer beneficial interest in a property investment from one person to another can be tax-efficient. It is a way to reduce the impact of Section 24 legislation in effect from 2016. It is also an excellent way to mitigate the impact of high-rate income tax bands on your income.
How to reduce capital gains tax using a deed of trust with HMRC form 17
A declaration of beneficial ownership & deed of trust could help you to avoid capital gains tax as these transactions are void from tax. It can help couples split assets to take advantage of their annual capital gains tax allowances.
You may be liable to Capital Gains Tax (CGT) if you sell a property. Each person receives an annual CGT allowance of £3,000 before any tax is paid. If a couple owns a property and it is sold, the first £6,000 is tax-free. After that, the gain is taxed on the investment property at 18% for basic-rate taxpayers and 24% for high-rate taxpayers.
A deed of trust may also minimise CGT liabilities as you can utilise one another’s CGT annual allowances. Not only that, but if done correctly, you can also identify the correct % allocation of income to maximise the basic rate tax band for CGT purposes.
This is more significant if you are married and the property is in one person’s name.
Our specialist property accountants have helped hundreds of UK property investors minimise CGT’s impact using a deed of trust and other tax-saving strategies. A transfer of property between spouses is just one way to minimise property tax.
Are there any HMRC rules for jointly owned properties?
It was not until my tax team spoke about this at length with HMRC that we discovered the deed of trust and form 17 need to be accompanied for properties already purchased in joint names.
Every property owned by a couple will be deemed to be held 50/50 unless you tell HMRC otherwise. This applies when you buy a property as tenants in common, with a split of 99/1 favouring the lower rate taxpayer.
Apportioning property profits could mean the risk of your self-assessment return being challenged without a deed of trust.
If the couple divorce, the assets will remain 50/50 until the divorce settlement has been finalised.
A deed of trust and form 17 must be sent to HMRC within 60 days of the declaration of beneficial ownership of trust document being signed and witnessed. HMRC will void the document after this point.
What are common mistakes made by solicitors?
We see many mistakes when using solicitors to prepare a deed of trust. Our property accountants for landlords have to correct the errors by conveyance solicitors.
– Solicitors may use templates and do not check them thoroughly. As a result, the names of the individuals or the property address is incorrect, voiding the whole document.
– They may not tell you that an HMRC form 17 declaration of income is required to ensure that property income can be reallocated. HMRC do not care that a deed of trust is done. If this is not done, the document becomes void, and you must start the process again.
If done correctly, landlord tax may be saved with property transfer between spouses.
You could ask your solicitor to do the work. Unwittingly you leave the office thinking that everything has been sorted. Sadly, HMRC cannot investigate the past six years’ worth of accounts. They can backtrack and unravel all your work.
They can return the property income to the high-rate taxpayer if they find you have re-allocated property income based on a deed of trust without submitting the required form 17 declaration of income.
Is Stamp Duty Land Tax (SDLT) payable when transferring property between spouses?
The beneficiary transfer of a property from one spouse to another does not give rise to Stamp Duty. This is because a gift from one spouse to another is a nil gain and nil loss. A beneficiary of interest transfer is not subject to Stam Duty Land Tax nor Capital Gains Tax (CGT).
We must remember that Stamp Duty Land Tax (SDLT) is only chargeable if there is deemed consideration. Consideration may be in cash, asset swaps or a mortgage.
Typically we see clients whose bank requests to add their spouse onto the mortgage when transferring a beneficiary entitlement to their spouse. This is deemed consideration and would be subject to Stamp Duty Land Tax on their share of the mortgage.
We advise clients who wish to transfer property between spouses not to amend their mortgage. This means that there is no change in the mortgage liability. If there is no change, then no consideration is given. Stamp Duty is not charged where no consideration is provided for a gift of property between spouses.
The 3% Stamp Duty charge does not apply to these transactions, as highlighted by HMRC’s manual (example 3).
“Husband wishes to transfer half of his only residential property worth £300,000 into his wife’s name. No cash changes hands, but the property is subject to a mortgage for £200,000. His wife has previously owned property but not at the time of the transfer.
As half of the property is transferred, the wife takes over half of the mortgage debt.
There is no Stamp Duty due on this £100,000 chargeable consideration as it does not exceed the tax threshold, but the transaction is still notifiable. N.B. First Time Buyer’s relief and Higher Rates for Additional Dwellings do not apply to this transaction.
Therefore the 5% Stamp Duty higher rate does not apply when transferring an asset between spouses, even if the mortgage liability changes from one person to another.
Can a deed of trust be challenged?
Yes, a deed of trust can be questioned or disputed in certain situations such as:
–Fraud or Misrepresentation: If one party alleges that the deed of trust was signed under duress, coercion, or with false information.
-Lack of Capacity: If it can be proven that one of the parties did not have the mental capacity to understand the terms of the deed at the time of signing.
-Breach of Trust: If one party fails to adhere to the terms outlined in the deed, leading to a breach of trust.
-Legal Formalities: If there are errors or omissions in the drafting or execution of the deed that render it legally ineffective.
If there’s a dispute, it might need to be resolved in court to decide if the deed of trust is legally valid and should be upheld.
Is it like a prenuptial agreement?
Yes, a deed of trust in the UK is similar to a prenuptial agreement. Both documents involve legally binding agreements that define ownership and financial arrangements:
-Ownership and Assets: Both documents clarify how property and assets are owned or will be divided between the parties involved.
-Legal Protection: They provide legal protection by establishing clear terms and conditions that can be enforced in disputes or separation.
-Customisation: Both can be tailored to reflect the specific intentions and circumstances of the parties involved, ensuring fairness and clarity.
Here is where things are different:
-Timing: A deed of trust is typically used for joint owners (joint tenants) owned property and can be executed at any time during ownership. In contrast, a prenuptial agreement is made before marriage to address assets and finances in the event of divorce.
-Legal Scope: Prenuptial agreements encompass broader aspects of marriage and separation, including spousal support and other marital rights, whereas a deed of trust focuses specifically on property ownership.
Despite the differences, both documents aim to make clear and protect money and property rights, although they apply in very different situations.
Extra help and resources
One-to-one personalised tax call with UK tax specialist
Rental property tax returns
Revenue and rental property tax calculator
Stamp duty on buy to let properties
How Optimise Accountants can help
As leading property accountants, we work with hundreds of retained buy-to-let UK landlords, helping them run more tax-efficient property businesses and to lower the tax paid from their rental incomes.
Call or book a one-on-one online call with our qualified, experienced team. We aim to help answer all your tax questions with strategic advice.
