Deed of trust on property

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

31st January 2022

The frequently asked questions about a deed of trust on property income

As property accountants, we are regularly asked about reducing property income tax and property capital gains tax using a declaration trust document referred to as a deed of trust UK.

We will look to answer the below questions in this article.

– What is a Deed of trust UK?

– Is a declaration trust document the same as a deed of trust?

– How do I reduce property income tax using a deed of trust 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 issue with mortgage lenders when using a deed of trust and form 17 document?

– Will I have to pay Stamp Duty using a deed of trust to transfer property ownership to my spouse?

Understanding the basics of declaration trust and deed of trusts

We are property accountants serving thousands of UK landlords. We know that many people will use a deed of trust document to reduce their UK income tax liability on the money made from their buy to let property investments.

A deed of trust may also be referred to as a declaration trust document. They are the same document as both state that one property owner wishes to transfer property to another. This may be in the form of capital or indeed derived from property.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

What is a deed of trust? Also called a Declaration Trust - Let our accountants for property investors help you understand more

A deed of trust is a legally-binding document that dictates the capital and revenue interests in a property.

There were a record number of buy to let UK landlords setting up companies for their property investments in 2020, with buy to let businesses being the second-highest company type incorporated after firms selling goods online.

More UK landlords set up buy to let companies between 2016-2020 than in the whole of the 50-year period preceding. By the end of December 2020, there was a record 228,743 buy to let companies in the UK. Of these new property investment companies, 34% were based in London.

A deed of trust can be used to transfer property income gained to reduce the amount of tax paid to HMRC.

At a time when more UK landlords are setting up buy to let businesses than in the last 50 years, tax-efficient tools such as a deed of trust can make a significant difference to a property investor’s tax bill.

As leading property accountants, we work with over 1,000 retained buy to let UK landlords, helping them to run more tax-efficient property businesses and to lower the tax paid from their rental incomes.

Where buy to let property is mortgaged, further professional advice may be necessary. A transfer of the beneficial interest may breach the terms of the mortgage with the lender. A transfer of an interest in land could also trigger an SDLT liability if the sum outstanding is over £125,000.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

What are the benefits of a deed of trust?

Splitting property profits 50/50 has tax benefits for couples. This is the case 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.

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 classed as the one benefiting from the rental income.

Using a deed of trust to transfer beneficial interest in a buy to let 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 effect of high rate income tax bands on your income.

However, as highlighted later in this article, CGT and SDLT considerations must be considered. The relevant documentation (a deed of trust and form 17) must be drawn up and, where appropriate, filed with HMRC.

Reducing Capital Gains tax using a deed of trust and form 17

Asset transfers from one spouse to another avoid capital gains tax as these transactions are void from tax.

This could help couples split assets between them to utilise their annual capital gains tax allowances.

If you are selling a property, you may be liable to Capital Gains Tax (CGT). Each person receives an annual CGT allowance of £12,300 before any tax is paid. If a couple owns a property and is sold, the first £24,600 is tax-free. After that, the gain is taxed on the investment property at 18% for basic rate taxpayers and 28% for high rate taxpayers.

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 also identify the right % 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 to minimise the impact of CGT using a deed of trust and other tax-saving strategies.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

So, what is new with the declaration trust?

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 the profits in the same way could mean there is a potential risk that your self-assessment return may be challenged.

If the couple divorce, the assets will remain 50/50 until the divorce settlement has been finalised.

A deed of trust and form 17 needs to be sent to HMRC within 60 days of the declaration trust document signed and witnessed. HMRC will void the document after this point.

What solicitors can get wrong and do not tell you about regarding deeds of trust

We see many mistakes when using solicitors to prepare a deed of trust. Our property accountants for landlords have to correct the errors made by conveyance solicitors.

– Solicitors may use templates and do not check them thoroughly. As a result, the names of the individuals or the property’s name are 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 have to start the whole process again.

Include your form 17 with the declaration trust (deed of trust)

You could ask your solicitor to do the work. Unwittingly you leave the office thinking that everything has been sorted. Sadly, HMRC can investigate the past six years’ worth of accounts. They can backtrack and unravel all your work.

They can put the property income back 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.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

Stamp Duty Land Tax (SDLT) consequences of a deed of trust

The beneficiary transfer of a property from one spouse to another does not give rise to SDLT. 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 SDLT nor Capital Gains Tax (CGT). We must remember that 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 SDLT on their share of the mortgage.

3% SDLT higher rate consequences of a deed of trust

Please note that the 3% SDLT 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 being transferred, the wife takes over half of the mortgage debt.

There is no SDLT 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 Buyers relief and Higher Rates for Additional Dwellings do not apply to this transaction.

Therefore the 3% SDLT higher rate does not apply when transferring an asset between spouses even if the mortgage liability changes from one person to another.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

Need advice?
Contact us now

Enquire about our ongoing services

Book a call to discuss our property accountancy services

Get in touch

Book a paid for tax consultation

Use the code “Art20” to get 20% discount

Book now

Book a call to see how we can help you.

Consultation options.

We offer the two following options for initial consultations.

CALL OPTION ONE

Our Ongoing Accountancy Services

Fixed price irrespective of how many properties you have

We charge on a fixed monthly fee

  • - Accounts submitted to HMRC & Companies House

  • - One hour onboarding tax call

  • - Unlimited 30 minute tax calls

  • - An holistic review of your tax structure and future plans

  • - Annual tax return review to discuss future tax plans

Our Monthly Accountancy Services

CALL OPTION TWO

Tax Consultation + Tax Report + Video Recording

(Free for clients)

Want tax advice right now? Book today

  • - Upload your questions in advance

  • - Our Tax Advisors collectively discuss your questions

  • - A qualified tax advisors discuss the very best solution with you

  • - A tax report & meeting recording is sent within 24 hours

  • - Clarification questions are answered via email

Tax call from £199.95

Booking your appointment.