A husband owns a rental property and is the sole legal owner registered at the Land Registry. He wants to keep the beneficial interest but give his wife all of the rental income. Can that be achieved by a Declaration of Trust over the income only?
The answer to your direct question is no. The reason is very technical: the anti-avoidance rules about “settlements” in ss 624-628C ITTOIA 2005 will apply to tax all the income on the husband. These rules do not operate where the spouse’s income arises from an outright gift which is not itself a gift of income alone. So if the husband transfers e.g. by a declaration of trust an interest in the property itself to the wife he will not be taxed on her share of income from it.
However ss836 and 837 ITA 2007 can also apply. The basic rule is that where spouses own property jointly they are taxed on income from it in equal shares. But they can make a declaration to be taxed on the proportion of income that corresponds to their actual beneficial interests in the asset. A Form 17 must be submitted to HMRC https://www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17. They set out detailed commentary at https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9800. Rental income is covered unless it is from furnished holiday lettings in the UK or abroad.
It is not possible to transfer the legal title into joint names and take advantage of the basic rule to enjoy each spouse being taxed on 50% of the income while only one owns the asset beneficially. The Declaration rules do not override the Settlement rules above. There must be an outright transfer to the wife of a beneficial interest in the property itself. Fortunately no tax charge should apply, whether CGT or IHT or SDLT. The transfer need not be permanent and the asset can be re-transferred at a later date.Provided the spouses are both trustees of the legal interest and beneficial owners (regardless of proportions) TRS registration will not be required.
There is a risk that the wife will refuse to do that and there must be no concurrent agreement for her to do so on demand. To set a finite period for the duration of the arrangement would not seem to transgress the law or the GAAR. Many couples will be prepared to accept the risk but they should be warned however remote it currently seems to them.
If they are content to share income and asset equally they could set up a joint tenancy. On the death of one the entire asset will pass to the survivor automatically, IHT-free if still married. If they wish to share in unequal proportions they will need to create a tenancy in common and then if one dies his or her share will pass under their will i.e. to the survivor only if it so provides.
Jack Harper
Hi Jack
I just read your very helpful reply and was wondering whether you think there would be a problem if the declaration of trust which transfers the husband’s entire beneficial interest (!00% of the property) to his wife was made revocably, so that the husband could undo the transaction if at some point in the future it would be better for him to take the beneficial ownership back again.
In my view a revocable gift is unlikely to comply with the requirements of s626 ITTOIA 2005.
It seems arguable that the gift is “wholly or substantially a right to income”: s626(3)
And is not an “outright gift” within s626(4) because:
"there are any circumstances in which the property, or any related property—
(i)is payable to the giver,
(ii)is applicable for the benefit of the giver, or
(iii)
will, or may become, so payable or applicable.
The right to revoke the gift is clearly caught by (iii) if not also by (i).
Jack Harper
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