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Rental Income & Deed of Trust

Rental Income & Deed of Trust

I was reading something in taxation magazine and am not sure I have fully understood the article or am generally just having a mental block. The article seemed to be inferring that a simple deed of trust and form 17 could be used by a married couple to split rental income from a jointly owned property from 50:50 to say 90:10. Is this correct as I had always believed that a married couple/civil partners had to declare the rental income jointly unless the actual underlying legal ownership on land registry was different?

The article then suggested that the deed of trust could be revoked prior to sale to ensure a 50:50 split for CGT purposes.

Thanks

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By JimFerd
03rd Mar 2016 16:31

It's correct

Legal title and beneficial interest are two different things - the beneficial interest being the important one for tax.

This deed that is suggested, changes the beneficial interest from that of the legal title.

So, for example you would have a piece of paper that (effectively!) says "Even thought we have joint legal title, person X has the beneficial interest of 90%, and person Y has 10%).

This piece of paper (the deed), would mean that persons X and Y are taxed on the above proportions.

Before this takes effect though, a form 17 needs to be submitted to HMRC.

Also, since husband/wife transfers are NGNL, there is no CGT to pay on the transfer of beneficial interest, so it's easy to revert back to 50/50 ownership prior to the sale to a third party.

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03rd Mar 2016 16:50

as i understand this can

only apply where the property is held as tenants in common...if its held as joint tenants then the DoT/Form17 route is not an option - you would need to change the ownership to TiC first.

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By Vision
04th Mar 2016 13:27

Deed

Many thanks for your replies

Is the tenants in common position definite?

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By JimFerd
04th Mar 2016 14:05

Yes it is.

I don't know the legal basis behind it, but the principle behind joint tenancy is that the rule is when one of the joint tenants die - the ownership automatically passes to the other regardless of wills etc.

Presumably there's no way to split this under law, so you need to instead own the property as tenants in common before you can modify ownership percentages.

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By mely
04th Mar 2016 14:09

Beneficial Tennants-In-Common

I remember reading that article and thinking the same thing. It may have been misleading, or perhaps I just didn't read it properly.  In any case, for joint tenants to split income in any proportion other than 50:50, they must also change their beneficial interest interest in the underlying property. Once they are beneficial tenants-in-common they can submit the declaration to HMRC per ITA07 837(1).  This is why the article suggests revoking the declaration prior to sale so the "capital" element is held 50:50 again.

 

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04th Mar 2016 14:38

For clarity, the default 50:50 split and form 17 are only ever relevant if property is held in the joint names of a husband and wife; that is that the legal interest is held in their joint names. It is not relevant if it is held by one for the benefit of them both, or if they hold it jointly with another party.

Where property is held in joint names, the income is deemed to be 50:50, except in specific circumstances, which includes the filing of form 17.

Form 17 can only be filed where the underlying beneficial ownership matches the beneficial interest in the income. The interests cannot be held other than equally unless the beneficial interest in the property is held as tenants in common.

The legal interest in the property, as registered with land registry, cannot be held otherwise than as joint tenants. It is possible to register the necessary deed acknowledging that the beneficial interest is held as tenants in common (in unequal interests, where applicable), but that is not necessary.

So HMRC's point that the interests must be held as tenants in common in order for 17 to be filed comes from the fact that he beneficial interest must be held as tenants in common before there can be unequal shares, and form 17 is only in point if there are unequal shares.

I saw the article referred to as well, and also found it misleading. But then, it was written by a solicitor.

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By Vision
04th Mar 2016 15:07

Deed of trust

Thanks

So husband and wife are TIC owning the BTL property 50:50. In this situation a deed of trust could be used along with form 17 to change the beneficial income entitlement to say 90:10?

I assume that the deed and form 17 would not need to be revoked when it comes to CGT as this would be split 50:50 per the TIC land registry title deeds i.e. the deed of trust is for rental income only?

 

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By JimFerd
04th Mar 2016 15:13

The split according to the deed applies for BOTH income tax and CGT. Effectively the deed alters the ownership.

If you don't want the 90:10 treatment applying to the future sale too - then you'll need to revoke the deed before sale.

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By mely
04th Mar 2016 15:42

Not sure I agree JimFerd

My understanding is that for tenants-in-common the capital and income interests can be held in different proportions.

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04th Mar 2016 15:46

Yes, but if the capital and income interests are held in different proportions, you cannot file form 17, bacause the legislation requires that they be in the same proportions to make the election. There is also the question of whether the party with the greater capital interest is settling income on the other.

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By mely
04th Mar 2016 16:18

Ah, of course...

They're H&W aren't they. I stand corrected, sorry JimFerd!

 

 

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