Rental property and declaration of trust...

Rental property and declaration of trust...

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Client purchased rental property in sole name.

Now that he is becoming close to being a higher rate tax payer he has brought a declaration of trust document which he has drafted himself saying that he wants the capital to be held 50:50... But rental income is to be split 99:1 to his wife as she has only minor income.

Obviously I would suggest that legal advice is taken but surely you can't hold capital half each and income in a differing percent?

They are married as I am aware of the fact it can make a difference!

Thanks

Replies (7)

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By mikeyban
07th Sep 2014 20:05

Edit upon reading form 17 guidance it would appear to forbid this and you need to hold property in tenants in common ?

Again confirmation of my understanding would be great!

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By martinscutt
07th Sep 2014 20:36

Need to be tenants in common

Also the income follows the beneficial ownership, which is what the declaration of trust would normally vary. So no. 

Only a problem with marriage/civil partnership. Other property partnerships can profit share as they like.

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By Justin Bryant
08th Sep 2014 11:19

Nothing in law

Stops people having joint (or p-ship) property with different capital/income shares per the link below:

http://www.hmrc.gov.uk/manuals/pimmanual/pim1030.htm 

The probem here is settlements legislation &/or s809aza ITA 2007 (tsf of income streams). I don't think having a H&W p-ship solves the problem.

http://www.taxation.co.uk/taxation/Articles/2012/02/08/35621/jointly-held-property

If you tsf 99% income & capital then that s/be OK.

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By Portia Nina Levin
08th Sep 2014 11:28

Nothing in law?

ITA 2007, section 836 is clear that married couples are taxable 50:50 on income from any jointly held assets, except in certain specified circumstances, which include making an election (on form 17) under section 837.

Section 837, in turn, is clear that in order to make the election the beneficial interests in the income and capital have to be the same.

So whilst you can do what you suggest legally, it will not then have any effect for tax purposes. PIM1030 mentions that. It does not touch the settlements legislation.

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By Justin Bryant
08th Sep 2014 11:44

Yes nothing in law

Only certain contracts are void/unenforceable in law, such as contracts to do illegal acts, contracts void for uncertainty etc.

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By Martin B
08th Sep 2014 12:50

Rental property and declaration of trust...

flagging

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By Ian McTernan CTA
08th Sep 2014 13:16

Make it easy and transfer the property to the wife completely (might incur stamp duty).

 Alternatively add her to the deeds and make it 50/50 ownership.

Take a look at the usage of capital- it might be better to remortgage and add another property, reducing the rental yield that incurs 40% tax by buying the next property solely in the wife's name.

Or set up a property management business, etc.

There are many ways that the client could benefit from some pro active advice.

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