Deed of Trust and Capital Gains Tax

Deed of Trust and Capital Gains Tax

Didn't find your answer?

A client married couple are planning on buying a second home in London, which they will use periodically, and mainly as a base when working in London.
However a friend will be occupying the property full-time, and partly funding the deposit and mortgage, and will have a Deed of Trust.
So the property and mortgage will be in my two clients' names and the friend will 'own' via a Deed of Trust.
The question is whether the Deed of Trust confers a legal right for the friend for Capital Gains purposes.
In other words will the friend's portion attract main residence relief, whilst my clients' portions will not (unless of course they elect for it to be their main residence)?
Also with the contributions of the friend to the mortgage repayments - can these be correctly treated as just that, and not rent received by my clients in whose name the mortgage will be in. I'm concerned that as time goes on the contributions will be increasingly of the capital repayments on the mortgage rather than interest.
Any advice would be much appreciated.
David Evans

Replies (6)

Please login or register to join the discussion.

avatar
By AnonymousUser
06th Jun 2007 16:42

Are not...
... the two individuals named on the Title Registry merely holding the legal title to the third individual's interest in the property on bare (or possibly resulting) trust?

At the same time, the equitable or beneficial ownership of that interest appears be owned by the third individual himself.

As a previous respondent has noted, the Inland Revenue accept that capital gains tax is a matter of beneficial ownership, rather than legal ownership. Accordingly, if the third individual does have beneficial ownership, he will be subject to CGT on his share if and when the property is disposed of. That seems right because, again assuming he has beneficial ownership, the legal or nominee owners of his interest will be required to pay him his share of the sale proceeds.

If he has been living in the property there seems to be no reason why he should not claim PPR Relief if and when his interest is sold.

The arrangements regarding the mortgaging seem odd but possibly they can be construed as the first two individuals borrowing 100% of the loan, paying two-thirds to the seller and lending one-third to the third individual on a back-to-back basis who then pays that third to the seller.

Payments by the third individual are then repayments of loan principal and interest that mirror a proportionate share of the payments by the first two individuals to the original lender.

The interest the first two individuals receive will be taxable income for them but it is not clear that they will be entitled to a tax deduction for the corresponding part of the whole interest that they pay to the main lender. If not, the arrangement may create a tax bill for them out of nothing!

Thanks (0)
By Jon Stow
06th Jun 2007 11:09

This is truly scary
and the only comfort is that your clients have not acted on this proposal yet. They probably shouldn't, and at the very least they should have professional advice on the whole scenario from a firm both specialist in tax law and trust law.

As the mortgage would not be in the name of the friend, you are likely to find that the payments by the friend may be rent (though there might be expenses including the mortgage interest to set against it),. There may on the other hand be problems with bounty being conferred on the friend given that the house will be legally owned by your clients. The trust legislation of 2006 has brought in a morass of problems I am not qualified to discuss in detail, but some of which I might guess (I appreciate the trust arrangement is to protect and define the friend's rights and financial contribution). The question of PPR may be somewhat down the list but would depend on the way the trust deed was drawn up. I am just shooting from the hip so there may be other difficulties when others or I have time to think about it.

I would suggest:
1) get professional advice from a qualified firm so that it is down to their PI policy.
2) Probably best not to do it in view of tax pitfalls and the difficulty of unwinding the "trust" arrangement at the end.

Thanks (0)
avatar
By AnonymousUser
06th Jun 2007 11:24

Beneficial ownership
I would concur totally with Jon's advice. The deed of trust is presumably intended to make clear the beneficial interests of the 3 people in the property given that only 2 have legal title. It is beneficial interest which counts for CGT. The friend's payments may arguably be contributions to purchase his or her interest. There is potential for all kinds of issues and future disputes in terms of what that interest might be and what he/she is entitled to when the property is sold (the deed of trust may govern this but it may not )let alone the tax and trust issues. Is there a reason they want to go down this route and if so what is it and maybe some better suggestion can be found? Presumably the mortgage company are aware of the position also?

Thanks (0)
avatar
By frauke
06th Jun 2007 13:10

CGT & Deed of Trust
I'm about to do something simular as you have stated. I have had numerous clients and family members who have done this for years, and I have also had the implications for CGT confirmed by the HMRC.

The answer is NO

The CGT liability belongs to anyone named on the Land Registry Title as the owners. Therefore 100% of the assessabilty to CGT is based on the 2 people named as the owners of the property according to the Title.

All the cases I have know - the person with the deed of trust (not on the title) alway contributes cash, usually the deposit with no additional contributions.

Any contribution the other person makes would be treated as "rent received" for tax purposes.

Thanks (0)
avatar
By CathyB
06th Jun 2007 15:49

CGT Manual
But the CGT Manual states in several places that the legal owner is not necessarily the beneficial owner and tax follows the beneficial ownership (CG 11730, for example). Indeed, at CG70280 et seq seems to bear out this view. CG70291 states that it is possible to transfer an interest in land by an oral declaration of trust so why not by a written one?

Thanks (0)
By Jon Stow
06th Jun 2007 16:15

But
although beneficial ownership may differ from what is shown at Land Registry on the deeds, the property is in the names of the couple as far as the mortgage company is concerned and I am sure the lender would not be comfortable if they knew a third party is involved. It might even be fraudulent if the mortgage company did not know, but on the other hand they would be on the high ground in the event of default by the couple, and the friend high and dry with nothing.

The mortgage agreement would be contrary to any Trust Deed, which might be invalid anyway for that reason (but ask a lawyer) and without proper and conclusive title in the light of conflicting documents and contributions by the friend would appear to be rent and PPR is out of the window.

The mortgage is the big complication here. A purchase between the three for cash and a deed setting out beneficial ownership would be no problem, but this cack-handed arrangement is ill-advised (I was going to say barmy).

Thanks (0)