Declaration of trust (beneficial interest)

SGiles

I bought a property in my own name in April 2011 and lived there for 3years and 5months before moving in with my girlfriend in August 2014. She owned her own house. I decided to rent my property out on a buy to let mortgage and I do so to this very day.

We married in July 2015 and bought our own home through a joint mortgage in July 2016 using the proceeds from the sale of my wife's house. I am a higher rate tax payer and my wife is in the low rate threshold and I'm aware of different ways I can reduce my Self Assessment payments e.g. Gifting the property, but I understand this would require approval from the mortgage lender & transfer of title etc.

My query is around the declaration of trust arrangement and I'd like to know if I've interpreted it correctly. If I were to 'gift' 99% of the properties' equity to my wife, she would be the beneficiary of 99% of the rental income and I would receive 1%. We would both have to complete a Self Assessment but the property would still be owned by me which means I won't have to change the mortgage or the Land Registry Title. I don't believe SDLT is applicable.

We are hoping to keep the property for the next 20 years and sell as part of our retirement/pension fund. I'm aware we'll have to pay CGT. Have I interpreted the DoT correctly, would this be acceptable evidence to the HRMC for paying the correct tax and are there any HMRC forms to complete?

I'm due to re-mortgage at the end of this month December 2017.

anselld

First you need to change ownership to Tenants in Common if it is not already.

Then DOT to change ownership to 99:1.

Then Form 17 to HMRC to declare unequal spit of income in line with actual ownership, ie 99:1

Ownership can be changed back to 50:50 well before selling via a new DOT.

It cannot be done retrospectively so the income only changes from 50:50 once all the steps above are done.

00ec25

there is general legislation which prevents you from diverting income from one taxpayer to another if the sole purpose was simply to avoid tax - "settlements legislation" https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4015

the answer to your question is NO you cannot rely only on declaration where the wife is not also a legal owner as the wife has made no contribution to the property to establish an interest in it other than the "tax avoiding" declaration of interest because you have retained an interest in the property yourself, so settlements legalisation means your interest is deemed to remain 100% - see example 3
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9923

the following examples further illustrate the significance of lack of "contribution" from the spouse where there is but a single legal owner
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9926

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9927

and this is the main example regarding retention of "interest" between 2 "spouses"
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9928


so as anselld says, you do need to make her a legal owner then follow the norm for married couples: declaration of trust and form 17...

NOTE - if the wife becomes a legal owner whilst there is an outstanding mortgage then SDLT liability would arise if half the value of the o/s mortgage is above the SDLT threshold. Also, if the wife becomes joint owner then it is safe to say her share is a major interest and will be above the £40k threshold applicable to higher rate SDLT so the transaction would be one at the higher rate.
see rules re transfer of ownership
https://www.gov.uk/guidance/sdlt-transferring-ownership-of-land-or-property

SGiles

Thanks both, I have received further advice which says to do the following:

1. Register both of us on the mortgage
2. Set up a DoT to transfer beneficial interest, avoiding the SDLT threshold percentage i.e £40,000 of outstanding mortgage
3. Form a partnership registering with HMRC distributing profits disproportionately to ownership i.e 100% to the lower rate tax payer

Does this seem correct?

observations_from_a_hill

Who advised you to do this?

00ec25

SGiles wrote: »

Thanks both, I have received further advice which says to do the following:

1. Register both of us on the mortgage
2. Set up a DoT to transfer beneficial interest, avoiding the SDLT threshold percentage i.e £40,000 of outstanding mortgage
3. Form a partnership registering with HMRC distributing profits disproportionately to ownership i.e 100% to the lower rate tax payer

Does this seem correct?

I hope you did not pay for that advice

what did you adviser suggest would be the operations of this "partnership" other than mere disproportional ownership?

did they discuss this with your for example?
When does a partnership exist?
Whether or not a taxpayer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the taxpayer is one of a group of joint owners who:

• let the jointly owned property, and
• provide significant additional services in return for payment.

Much depends on the amount of business activity involved. The existence of a partnership depends on a degree of organisation similar to that required in an ordinary commercial business.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

SGiles

It was a company online

SGiles

Thank you for your reply. Would SDLT come into play because I have an outstanding mortgage and 99% would take go above the £40K threshold?

SGiles

00ec25 wrote: »

NOTE - if the wife becomes a legal owner whilst there is an outstanding mortgage then SDLT liability would arise if half the value of the o/s mortgage is above the SDLT threshold. Also, if the wife becomes joint owner then it is safe to say her share is a major interest and will be above the £40k threshold applicable to higher rate SDLT so the transaction would be one at the higher rate.

Thank you for your comment. So If I was to set up the DoT at a ratio which avoids the SDLT threshold i.e. £109K outstanding mortgage, split 36/64 which equates to £39,240/£69,760 in my favour, this would work?

00ec25

read the guide
https://www.gov.uk/government/publications/stamp-duty-land-tax-higher-rates-for-purchases-of-additional-residential-properties

BoGoF

This is something that needs done properly and not on the cheap so instead of coming up with revised proposals every night you may want to pay for professional advice.