Property, Tax & Declarations of Trust

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Many rental properties are owned jointly, but only up to 4 names may be registered with the Land Registry.  It is therefore very common for joint owners of property to enter into a Declaration of Trust to document the full ownership structure.

Declarations of Trust may be used where there are fewer than 4 owners, and can be useful ways to set out who is entitled to income and gains.

A Declaration of Trust can effectively transfer a part share in a property for capital gains tax purposes, without having to transfer legal title.  However, you should note that the creation of the Trust itself can have a tax consequence.  This is because Capital gains tax (CGT) is charged on gains arising on the disposal of an asset and although there is no statutory definition of the term “disposal” it is generally accepted that a disposal occurs when beneficial ownership (as opposed to legal ownership) of an asset changes.

Therefore, a gift of part of a beneficial interest will be a CGT disposal.  Further, despite being a gift (that is, a transfer for nil consideration), the disposal will be deemed to take place at market value for CGT purposes where it is a gift (as this is not a market value disposal).

However, transfers between husband are wife are deemed to be on a no loss/no gain basis (section 58, Taxation of Chargeable Gains Act 1992 (TCGA 1992)).

A declaration of trust will also enable the parties to include any express terms that may be desirable, for example, provisions dealing with a situation where one wishes to sell or practical arrangements for day-to-day issues such as how the parties will share the maintenance costs.

Under current practice, a properly formed declaration of trust should be sufficient to satisfy HMRC, that is, a legal transfer will not also be necessary. For income tax and CGT purposes, any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to their beneficial shares in the property, as evidenced by a declaration of trust.

 

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