How best to split income on a Buy To Let - married. How do you decide beneficial ownership

How best to split income on a Buy To Let -...

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I am about to buy a BTL property but want my wife to receive most of the income.

It looks like there are 3 ownership options and wonder which gives us the most flexibility?

1. If I buy the property in my sole name is it possible for my wife to receive the income and be taxed on it OR do I have to receive the income and be taxed on it?

2. If we buy as joint tenants my understanding is that the income would HAVE to be split 50:50 so thats not really any good.

3. If we are tenants in common I could say own 90% of the property but the income would be split 50:50. However I have read we could vary the split with a S17 election but we would also have to vary the beneficial ownership. I am confused by beneficial ownership. Lets say I want to own 90% of the property but I want my wife to get 90% of the income..how could I arrange that .. what would be the legal process?

Replies (16)

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By Tim Vane
28th Aug 2015 10:07

How much do you trust your wife?

Beneficial ownership is a question of fact. In order for your wife to receive 90% of the income she would have to have an entitlement to 90% of the property. At the risk of being insensitive, if she were to later take a shine to her pilates instructor then you might have a problem. You should speak to a solicitor.

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Replying to noelpopplewell:
By johngroganjga
28th Aug 2015 10:13

Separation/ dovorce

Tim Vane wrote:

At the risk of being insensitive, if she were to later take a shine to her pilates instructor then you might have a problem.

Best not to overstate the problem in the event of a separation or divorce.  If that occurred, both shares of the property would be in the same matrimonial pot, and, in the absence of the parties agreeing, the court would just make orders to divide the pot as it saw fit.  The actual legal ownership at the start of that process would be neither here nor there.

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By awoodj
28th Aug 2015 10:50

As John says the split is assumed 50/50 whatever the beneficial ownership is if you split later. One other thought, with the potential changes in the tax regime regards finance cost deductions you may want to consider who has the mortgage. If you plan to expand portfolio further you may also want to consider whether properties should be bought in Ltd. company. If a new investor with no track record that may not be so easy though as finance very restricted but worth checking.

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Replying to Wilson Philips:
By johngroganjga
28th Aug 2015 11:00

Not quite

awoodj wrote:

As John says the split is assumed 50/50 whatever the beneficial ownership is if you split later. 

Not quite what I said. I said the division of the whole pot would be whatever the parties agree or the court decides. That may well be 50/50, but we don't know, and it is irrelevant to my point. My point is that the actual ownership (legal or beneficial) at the start of the process is neither here nor there. 

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By awoodj
28th Aug 2015 11:05

Fair enough, I should have said the usual starting point for those negotiations is 50/50 of total assets and then other factors may be considered which may alter this.

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By Openhouse
28th Aug 2015 11:26

Thank you for the feedback.

If we owned the property 50/50 as tenants in common could the income be split 90% to my wife and 10% to me? OR to achieve that income split would the house have to be 90% in her name and 10% in my name.

Don't quite understand the difference between legal ownership and beneficial ownership although I do understand it is the beneficial ownership that affects tax. How do you set up a different legal ownership to beneficial ownership? Is it more than just the S17 thing?

I assume that if I owned the property in my sole name my wife could NOT receive the income from the property. Is that correct?

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By King_Maker
28th Aug 2015 16:22

The short is answer is that you cannot own 90% of the property and your wife to be taxed on 90% of the income.

But it is possible for you to own 90% of the property and your wife to be taxed on 50% of the rental profit.

I suspect you mean Form 17 rather than section 17?

I assume you have not discussed this matter with your solicitor and accountant?

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By Stuart.thomson
31st Aug 2015 10:38

Beneficial ownership is a form of ownership where you have the right to something but not necessarily the legal title. If you gave your child £10 to buy a ball and he does as he's told and buys the ball then the ball is his but as you have a claim as you paid for it. Beneficial interests is a complex legal construction designed centuries ago to stop the gentry taking back the land of their subjects on their subject's death (ie as they don't own it death does not change ownership).

It is possible to split the capital and income interest lines but as it will be a question of fact, I suggest you speak to an trust lawyer or accountant to help you understand how this "may" be done.

I think the advice above is sensible from other responders. I own property as tenants in common with my wife but it has IHT disadvantages. You cannot after all have your cake and eat it (unfortunately)!

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By Duggimon
01st Sep 2015 12:10

Beneficial interest is not permanent

In order to determine the beneficial interest which determines your income share you need to fill out form 17 and submit to HMRC, The form can state whatever beneficial interest you like and this does not, I believe, affect the legal title of the property.

The form 17 declaration remains in effect until one partner dies, there is a separation or divorce or the beneficial interest in the property changes.

The answer therefore would seem to be to submit this form stating how you want the income split with your wife, it doesn't affect how the property is owned, only the beneficial ownership and that is a temporary thing in any case which can be altered in future by any change, however small, to the beneficial interest in the property or property income.

One slight hiccough you might have is that the form needs to be received by HMRC within 60 days of being signed and I don't think they're processing mail fast enough for that at the moment!

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By User deleted
01st Sep 2015 12:36

Form 17 declaration ...

... MUST match beneficial ownership or may be rejected by HMRC.

Even if it is accepted, if it later transpires the declaration did not match the actual situation you could have a big back tax problem, and possible criminal charges. If you have an accountant and he is aware of the discrepancy and you do not resolve it he should also make a money laundering report (without telling you) 

http://www.accaglobal.com/gb/en/technical-activities/technical-resources...

 

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By michaelblake
01st Sep 2015 16:52

Confused

Try this. The three general principles that may be applied to any land and buildings in England, Wales and N Ireland are that:

1. Where a property is owned jointly by two people the legal title to the property would normally be registered in both names.

2. Tax is concerned with beneficial ownership and not legal title.

3. The presumption in land law in England, Wales and N Ireland is that beneficial ownership follows legal title, unless there is a deed recording that the registered title and the beneficial ownership are different.

Turning to the specifics of the question:

4. Where a husband and wife own property jointly there is specific income tax legislation (ITA 2007 Section 836) that says that the income from the property has to be taxed as though it were shared equally between the two spouses, unless all of the following apply:

(a) The spouses are living together and own the property as tenants in common

(b) They do not share the beneficial ownership of the property equally 

(b) They elect to share the income according to the unequal beneficial shares that they own.

As others have noted the unequal split only applies from the date of a valid election on Form 17 and the form has to reach HMRC within 60 days of signature by both spouses. There is detailed guidance in the HMRC manuals at TSEM 9800 et seq - see link at

http://www.hmrc.gov.uk/manuals/tsemmanual/tsem9800.htm 

As you will note from that guidance HMRC require evidence in the form of a deed (which they often refer to as a declaration of trust) that the property is owned as tenants in common in unequal shares whenever an election on form 17 is made.

The underlying beneficial ownership of the property (and the way the income is shared between spouses if an appropriate and timely election is made) may be varied at any time but every time the ownership is varied the variation would have to be evidenced by a deed that records the change of ownership. The title would remain unchanged.  

 

 

 

 

 

 

 

 

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By King_Maker
02nd Sep 2015 12:31

@michael blake -  a Deed is

@michael blake -  a Deed is NOT required either for the establishment of unequal beneficial interests or their variation (although recommended) - hence HMRC's reference to a Declaration of Trust as possible evidence.

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By Openhouse
02nd Sep 2015 17:02

Thank you for excellent feedback and I get the basic principles involved which Michael kindly explained very well.

Just not sure of the nuts and bolts of establishing beneficial ownership. Does this have to be done by a lawyer and also advised to the Land Registry or is there a simpler and cheaper way to establish beneficial ownership? If it has to be done via a lawyer I guess the lawyer would need to be approached each time the % is varied? OR is just doing the Form 17 enough (I would guess NOT!!)

So basically you can own 90% of a property and your spouse own 10% but the income and CGT will be split 50/50.

But you cannot own a property 50/50 and split the income 90/10.

Just need to understand what is involved from a practical standpoint to set up beneficial ownership.

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By King_Maker
02nd Sep 2015 19:30

No - the income is split 50:50, in the above example,  by NOT submitting Form 17. This pre-supposes that the Legal title is in joint names.

CGT would remain split 90:10.

Only a solicitor or barrister can prepare a Deed (and charge for it).

I would strongly recommend you obtain legal advice - the tax issue is merely one aspect to consider.

 

[Have you done a search on the forum, as the question comes up on a regular basis?]

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By michaelblake
03rd Sep 2015 09:48

Deeds and declarations of trust

 

Just to clear up the remaining points:

1. A declaration of trust is a type of deed. A deed is simply a document signed by the parties to the agreement where the signatures on the agreement are witnessed by third parties who do not benefit from the transaction mentioned in the document.

2. Anyone can prepare a declaration of trust but as noted above only a solicitor can charge for that work.

3. A new deed recording a variation in how the fractional shares in the property are owned is needed every time the fractional ownership is changed.

4. The form 17 alone does not change anything. It is simply the prescribed form that HMRC have decided an election under TA 2007 Section 837(3) has to be made in, following any change in beneficial ownership.

4. Variations in fractional ownership do not need to be notified to the Land Registry every time they are changed if the two joint owners remain the same. 

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By King_Maker
03rd Sep 2015 14:18

@michaelblake :

1. Not necessarily - an Oral Declaration of Trust is able to transfer Beneficial interests. However, if it relates to land, it needs to be in writing, but does not have to be a Deed  (section 53(1)(b) LPA 1925).

2. Or a practicising Barrister.

3. As 1. above - no Deed required.

4. HMRC consider a filed Form 17 to be evidence of how a gain should be split for CGT purposes.

5. Yes, the LR is primarily concerned with the Legal Title.

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