Declaration of trust on rental property - what does it actually mean?

Shindymindy

Hi all, 

Can someone please explain to me in simple terms how a declaration of trust on a rental property works? 

I was under the impression that if a declaration of trust was made for a rental property, the rental income could be divided how we like between the 2 parties (husband & wife) in order to avoid the higher rate tax payer having more tax to pay on their share of the rental.
 
I've now heard that a declaration of trust actually changes the percentage OWNED of the house and not just the rental income - is this correct?

The situation in bullet points: 

We own a home 50/50.
We are releasing equity in said home to buy a new main home.
Current home will become a rental in both our names (husband & wife) - not through a business.


I've had to take in so much information recently with the new purchase, mortgages, re-mortgages, solicitors, aging parents, kids etc that I can't comprehend this bit - information overload if you will. 

Any help would be greatly appreciated. 

A very mentally tired forumite

Jeremy535897

It is a complex situation. Normally, for a married couple, the income from a jointly owned property is taxed 50:50, however the house is actually owned, unless the ownership is not 50:50 and a Form 17 is submitted to elect to have the income taxed according to the true ownership split.
There are cases where property ownership is a partnership, or where different profit shares can reflect different amounts of work done by each co-owner, but not in the simple case of one rental property jointly owned between husband and wife.

Bookworm105

sorry but "we own 50/50" is inadequate info

If you own the property as Joint Tenants then you cannot alter the income split using a declaration. It must remain 50/50 because technically there is no share that can be split, you each own 100% of the property (*) but due to your marriage, and for practical purposes, you are treated as 50/50 for income tax. If you do own it as JT then you would need to legally sever that JT and re-register the property as Tenants in Common 

If you own the property as Tenants In Common then there are defined shares held by each of you respectively and so you can declare a new split of those shares by using a declaration of trust. That declaration does indeed alter the actual ownership share, it is not just an income splitting device. Therefore were you to sell the property you and your husband would be taxed on your declared shares for Capital Gains Tax for example given the property is let and therefore will, eventually, be liable to that tax.

Where there is a declaration of trust in place that specifies the respective shares, you can submit that with the Form 17 to support the split of rental income for income tax purposes.

You can of course do a new declaration and Form 17 at a later date if you wish to alter the shares again.
Also note that technically doing so just before sale runs the risk HMRC can refuse to accept it as they class it as CGT avoidance. You would instead need to alter it a "reasonable" period before sale, ideally whilst still receiving rental income, so you can show that income tax was paid at the new split and therefore it was not just done for CGT purposes. . 

Jointly owned property and form 17 | ACCA Global

* With JT the survivor gets the property on death of the other person since each person already owns 100% of it. so there is no "share" which can be left to someone else.
With TIC you need a will that clearly stipulates who gets the deceased's share, so keep your will updated if converting from JT to TIC.

Shindymindy

Thanks to you both