I have been preparing rental accounts for a client for 10 years. He 'owns' three furnished properties on interest only mortgages and normally makes a small profit each year. I have just discovered that when my client purchased the second property that there was a problem with the mortgage application and the mortgage was taken out by his father and the property is actually owned by his father. My client assumed that this was not a problem as he was paying the mortgage, repairs etc. and declaring the income.I assume that his father will now have to sell the property to his son and therefore incur a capital gain? (Unless someone has another solution to the problem) What about the last 10 years tax returns?
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I had a similar situation
I think you can treat this property as being in "trust" for the client. It's at least worth considering.
I wouldn't guarantee I am right though and I would ask the client to obtain a legal opinion.
seen it before
I've seen many contributors state that a "bare" trust can be created at will, but my understanding of English law is that a trust cannot be created without a deed, especially where it concerns freeholds which can only be transferred where the transfer is written. My view would be that the property is owned by the father, and he should have declared the income himself and it's his capital gain when it's sold.
pawncob wrote:
I've seen many contributors state that a "bare" trust can be created at will, but my understanding of English law is that a trust cannot be created without a deed, especially where it concerns freeholds which can only be transferred where the transfer is written. My view would be that the property is owned by the father, and he should have declared the income himself and it's his capital gain when it's sold.
No, an express Trust does not have to be created by a Deed, merely it has to be evidenced in writing if in respect of Land. So an Oral Declaration of Trust can be valid if so evidenced. A resulting or constructive Trust does not have to be evidenced in writing.
The CGT position will depend on the agreement between the parties.
This trust concerns freeholds
So it must be evidenced in writing.
http://en.wikipedia.org/wiki/English_trust_law
pawncob wrote:
So it must be evidenced in writing.
No disagreement there.
However, your initial post stated that a Deed was necessary. This is not so. It may well be the most prudent option, as it is likely to involve a solicitor/barrister.
I would agree this is a bare trust.
Legal ownership lies with the father but the beneficial interest lies with the client, who has enjoyed the rental yield, paid the associated tax and paid the mortgage.
There is no need for the father to sell anything - if he does not own anything.
He merely has to transfer the legal title to his son.
No CGT nor SDLT should be due.
Mortgage
Thank you King_Maker.
I assume that this is something my client would have to sort out with a solicitor although it could get complicated with the mortgage. Can the mortgage be transferred into my client's name?
It's like applying for a mortgage all over again.
Yes
Go and check with a lawyer. I think a bare trustee has the same powers as any other trustee of land under ToLaAoTA 1996 s1(2). Under that Act a trustee (as defined) has all the powers of an absolute owner (s6(1)) including mortgaging the land.
Father and son have a choice :
1. Do nothing about the Legal Title at LR, but draw up some form of Memorandum/Declaration of Trust to reflect the son's 100% Beneficial ownership.
2. Transfer Legal title into son's sole name.
A solicitor can do this and advise at the same time.