Property declaration of beneficial ownership deed of trust & form 17 (HMRC)

What is a UK deed of trust? Our Expert Guide

As property accountants, we are regularly asked about reducing property income tax and property capital gains tax using a declaration of beneficial ownership document often referred to as a deed of trust. This is why we have written this expert guide.

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

– What is a Deed of Trust UK?

– 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 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 and form 17 document?

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

Can you save property tax with a transfer of property between spouses? Albeit it is a mouthful “deed of trust declaration of beneficial ownership“, it is an essential feature of our property accounts works to reduce property tax for our landlords.

Understanding the basics of declaration of beneficial ownership

What is a Deed of trust UK?

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 transfer of property between spouses is legal and ethical.

A deed of trust may also be referred to as a declaration of beneficial ownership trust document. They are the same document as both states that one property owner wishes to transfer of property between spouses. This may be in the form of capital derived from property.

What is a deed of trust UK also called a declaration of beneficial ownership Trust?

A deed of trust 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.

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 50 years preceding. By 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.

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 significantly affect 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 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.

Please note that care is required with conveyance solicitors. They often miscalculate Stamp Duty leading to higher tax payments to HMRC necessarily. 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.

Care must be taken when you look to transfer property between spouses so that Stamp Duty is calculated correctly.

It is recommended that your solicitor and tax advisor supports you with the deed of trust declaration of beneficial ownership documents. This is especially the case when form 17 needs to be submitted to HMRC.

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 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 impact of high-rate income tax bands on your income.

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

An HMRC form 17 form is only completed if the property is owned 50/50 and there is a property transfer between spouses, resulting in a different sharing. A form 17 HMRC form is not required where the property is not currently owned 50/50. A transfer of property between spouses where a property is owned 100% by a husband and a share is to be gifted to his wife/civil partner.

Reducing Capital Gains tax using a deed of trust and form 17 HMRC to transfer property between spouses

A declaration of beneficial ownership & deed of trust could help you to avoid capital gains tax as these transactions are void from tax.

This could help couples split assets to utilise 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 £12,300 before any tax is paid. If a couple owns a property and it 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 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 one way to minimise property tax.

Could declaration of beneficial ownership & deed of trust help you reduce several elements of tax?

So, what is new with the declaration trust in order to transfer property between spouses?

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 and form 17 if the property was originally owned 50/50.

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 solicitors can get wrong

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.

Include your HMRC form 17 with the declaration of beneficial ownership (deed of trust) to transfer property between spouses

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 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.

Stamp Duty Land Tax (SDLT) consequences

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.

3% SDLT higher rate consequences

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

Bonnalack & Bishop suggests: “With tenants in common, if you die, then your interest in the property does not automatically pass to the survivor – instead, it will be classified as part of your estate, as such will pass under the terms of your will [unless you didn’t have a will, in which case the property will be transferred according to the intestacy rules] – read more