Declaration of Trust

(Paul Mounce) #1

Client are husband and wife who have purchased a new property and retained their previous property which they intend to rent. husband is a higher rate tax payer while wife is basic rate. There is a mortgage on the property and so they have been advised by the accountant to create a declaration of trust transferring the majority of the equity to the wife. Speaking with our property department they inform me that it is usual to do a 99%/1% split but not sure why. Is there any reason that the equity cannot be passed wholly to the wife and be held on trust by them both fully for her?

Paul Mounce

(malcfinney1) #2

I’m a little bemused as to why non-one has answered your query. I therefore proceed somewhat cautiously.

For income tax/CGT purposes there is no reason of which I am aware that precludes the declaration of trust providing for a 100/0% split of the beneficial interest. The mortgage is presumably a joint mortgage in which case if the 100% owner discharges the interest it should in principle be deductible against rents (subject to the new April 2017 rules). As the parties are husband and wife, to override ITA 2007 s.836 an appropriate joint election under ITA 2007 s.837 will be necessary.

Has the property dpt suggested that a 100/0% split would contravene the terms and conditions of the mortgage unless at least 1% is retained by one party?

Malcolm Finney

(sue.moore) #3

Most transfers between husband and wife are tax neutral but not so when it comes to SDLT; the wife taking on the husband’s share of the mortgage will be treated as payment for his share and attract SDLT accordingly, including the additional 3% if it is a second property.
I suspect the reason for keeping 1% in the husband’s name is to make it easier to transfer a percentage back to him before sale to take advantage of his annual exemption.

Sue Moore,

(Paul Mounce) #4

Sue, is this not only the case if the property is only owned by one of the spouses. In this case they are both legal owners of the property in question and also both already on the mortgage. Therefore the only thing being changed is the equitable title and no consideration changing hands, or am I missing something?

Paul Mounce

(malcfinney1) #5

The SDLT higher rate charge of 3% will not apply to the inter-spouse transfer [Sch 4ZA new para 9A].

There would in any event be no need for the transferee spouse to take on any part of the transferor’s liability under the mortgage as between themselves.

Malcolm Finney