Relevant to the tax year 2020-21
What is a deed of trust?
You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.
If you wish to know the basics of Capital Gains Tax and annual CGT annual allowances be sure to read this article first.
Are you married/in a civil partnership? Do you own property investments between you? Is one person a higher rate and the other a basic rate taxpayer?
You may already be aware that you could be better off splitting your property profits in favour of the lower rate taxpayer. HMRC will always assume spouses own a 50/50 share in all property unless you tell them otherwise?
A deed of trust is a legal document that dictates the capital and revenue interests in a property. Typically couples own property as “joint tenants“, which means that the property is owned 50%/50%. The other way to own property is as “tenants in common“, which specifies a different split in ownership and profits, meaning one person can have 99% of the income and the other person receives just 1%.
Please note that the deed of trust is a legal document. The deed of trust is therefore legally binding. Many solicitors will also update the land registry to show the public that there has been a change of legal ownership. The change will also affect how assets are passed on death. Make sure you speak with a solicitor about this.
What are the benefits of a deed of trust?
Reducing property profits using a deed of trust and form 17
Splitting property profits 50/50 has a negative tax implication on couples where one partner is a higher rate taxpayer and one a basic rate taxpayer — they could pay less tax overall if all of the property income was included on the lower taxpayer’s income.
A deed of trust is, in effect, 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.
Reducing Capital Gains tax using a deed of trust and form 17
If you are selling a property then you may be liable to Capital Gains Tax (CGT). As we explained in more detail in a previous article each person receives an annual CGT allowance of £11,300 before any tax is paid. If a couple own a property and it is sold then the first £22,600 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 identify the right % allocation to maximise the basic rate tax band for CGT purposes too. This is more significant if you are married and a property is in just one person’s name.
We have helped by property investors to minimise the impact of CGT using a deed of trust for many years.
Capital Gains Tax Calculator – £9.95
This CGT calculator will tell you how much is to pay and how to reduce it further.
So, what is new?
It was not until my tax team spoke about this with HMRC at length that we discovered that the deed of trust and form 17 needs to be accompanied for:
- Properties already purchased in joint names
- Properties couples buy in future under a ‘tenants in common’ structure where ownership is not 50/50
This means that every property owned by a couple will be deemed to be owned 50/50 unless you tell HMRC otherwise. Even if you buy a property as tenants in common with a split of 99/1 in favour of 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. This is because although you bought the property in the correct way, you failed to notify HMRC via the form 17.
If the couple divorce then the assets will remain 50/50 until the divorce settlement has been finalised.
Download your buy to let tax guide here, written by our property accountants
Step by step guide to implementing this strategy
It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:
1 – Identify whether you’d pay less tax by changing the ownership between a higher and lower rate taxpayer
2 – If so, speak with your solicitor and get them to do a deed of trust. Specify 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
What solicitors get wrong and do not tell you about in regard to Deeds of Trust
One set of professionals you think you should trust are solicitors. They are quite happy to take your money in exchange for a Deed of Trust. Here are some of the issues that clients have found when using solicitors to prepare a Deed of Trust, and our experience of then correcting their mistakes:
- Solicitors using templates and do not check them. As a result, the names of the individuals or the name of the property is incorrect, voiding the whole document.
- They do 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
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 hard work. They can put the property income back to the high-rate taxpayer. If they find that you have reallocated property income based on a Deed of Trust without the submission of the Form 17 declaration of income.
Deeds of trust heartache
What amount of tax would you have to pay back if you have done a deed of trust without a Form 17? How much heartache and administration would be caused as a result of the solicitor’s work? The sad fact is that solicitors cannot be held responsible. They have done what was requested and that was to create a legal document called a Deed of Trust. The fact that they did not tell you or you did not know that an HMRC Form 17 declaration of income was needed to be completed is in effect your fault.
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. As such 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 the form of cash, assets swaps or a mortgage.
Typically we see clients that are requested by their bank to add their spouse onto the mortgage when transferring a beneficiary entitlement to their spouse. This is deemed a consideration and would be subject to SDLT on their share of the mortgage.
Example of how SDLT applies to a transfer of beneficiary interest from one spouse to another
Sarah and John are married. Sarah is a high rate taxpayer with her employment. John no longer works as he wishes to focus on building a property portfolio. They wish to transfer the beneficiary entitlement of 1234 Main Road to John to be more tax efficient. Sarah owns 100|% of the property in her own name with a £300,000 mortgage.
Sarah contacts that mortgage provider to tell them that a deed of transfer has been drafted to transfer her beneficiary entitlement of 123 Main Road to John. The mortgage company wants her to add John to the mortgage. This now gives rise to an SDLT charge because he will assume 99% of the mortgage, being the same as the deed of trust beneficiary interest. 99% of the £300,000 mortgage is £297,000 and SDLT will be charged on that basis.
It would be better to ask the bank for permission not to add John onto the mortgage. This means that no mortgage liability will be assumed by John but gets the benefit of the property income. As no debt is assumed, no consideration is given to the property. In turn, no SDLT applies
Stamp Duty Land Tax Calculator – £9.95
This SDLT calculator will tell you how much is to pay and how to reduce it further.
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 HMRCs 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, half of the mortgage debt is being taken over by the wife.
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 are not applicable 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 per Paragraph 9A of Schedule 4ZA of the Finance Act 2003 where it states
“Exception where spouses and civil partners purchasing from one another
4After paragraph 9 insert—
“Spouses and civil partners purchasing from one another
9A (1)A chargeable transaction is not a higher rates transaction for the purposes of paragraph 1 if—
(a) there is only one purchaser,
(b) there is only one vendor, and
(c) on the effective date of the transaction, the two of them are—
(i) married to, or civil partners of, each other, and
(ii) living together (see paragraph 9(3)).”
Other considerations when transferring the beneficiary entitlement from one spouse to another
It is worth noting that if only one person is on the mortgage and they die. Their spouse would need to apply for a mortgage to take it over. This could cause issues if they are not deemed mortgageable without their spouses’ income.
This requires you to speak with your mortgage broker and solicitor. Speak with them about the tax tips. See what implications they can identify and solve. You may decide to add your spouse to the mortgage and pay the SDLT. The spouse added to the mortgage will also become legally responsible for their share of the mortgage repayments.
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