Deed of trust for tax efficiency

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    Deed of trust for tax efficiency

    Hi All,

    New here and been receiving conflicting advice.

    So I will try and be as informative as I can.

    I have a consent to lease on a mortgaged property which I am currently renting out. Mortgage is in my name only and fixed in a 2.5% deal till 2023.

    I fall in higher rate tax bracket and my wife is not working.

    Is it possible to have rental income directed to her for tax efficiency even though she is not on mortgage.

    I called bank but they won't add her name, only way out is to pay early repayment charges and get a new BTL mortgage.

    As for financials

    Property Value - 140k
    Mortgage left - 62k
    Monthly rent - 625

    Someone advised to look in to deed of trust and form 17, is that an option without her name on Mortgage. Is there anything else I can do to be more tax efficient.

    Thanks in advance for any help

    Palmist

    #2
    Yes you could make your wife a co-owner (tenant in common)

    No you can't just direct rental income her way, you have to direct income and expenditure in the same proportion

    But you can't/should not bypass the mortgage provider. The wife will actually OWN whatever proportion gifted to her, and they absolutely would want/need to know about that and approve that change in ownership.

    Form 17 has to do with ACTUAL ownership

    If you get divorced/die/she gets sued -- she will own it too

    Comment


      #3
      Thanks, so does adding her as tenants in common requires her to be on mortgage too.

      When I look at the total tax I would end up paying by 2023, paying penalty now and getting a new BTL seem a lucrative option.

      There must be a better :-)

      I got a quote from Sam conveyancing and they confirm that I don't need her on mortgage for a DOT but I am suspicious.

      Comment


        #4
        You can I suppose have a separate deed of trust (with her not named at Land Registry on the title). All the caveats about divorce etc would still apply as this is ACTUAL beneficial ownership. HMRC might not buy it though (and the mortgage company would still want to know - not telling them might be viewed as fraud - and they might still not be pleased). I suspect they might well find out because there is a lot of information that sloshes around between these various parties.

        Comment


          #5
          Your current situation seems to be :
          Property rental income = £625 x 12 = £7500 .
          Maintenance cost including building insurance say £1000
          Mortgage interest = £62 K x 2.5% = £1500.
          Your rental profit = £5000 paying 40% tax = £2000 tax bill.

          You want to move to a lower tax situation :

          If you were to gift 5% interest in your property to wife by deed = £140K at 5% = £7K ( vale of gift ) , you would be "joint owners" of the property ( But not registered at Land Registry., due to refusal by mortgage lender ).

          So you prepare a second deed signed by "joint owner" to share the annual rental income say H 10% and W 90%. ( H gets £500 and W gets £4500).

          So you pay 40% on £500 rental income = £200 tax. Wife's share of £4500 is below the personal allowance.

          So you have to ask Sam if this 2 deeds will be acceptable to hmrc and how much for preparing 2 deeds ?

          Comment


            #6
            Under property law you can do the following:

            1. If there is no restriction on the register preventing it, transfer the property to yourself and your wife.

            2. If there is such a restriction, transfer the property to yourself and your wife with the consent of the lender.

            3. Assign 50% of the beneficial interest to your wife, but remain as sole owner on the title at the Land Registry. This does not require the lender's consent.

            4. Execute a declaration of trust declaring that you hold the property for yourself and your wife in equal shares. This is not strictly the correct way to do things from a conveyancing point of view, but has the same effect as 3. It does not need the lender's consent.

            5. Assign to your wife the income only of the property for a limited period. This does not need the lender's consent.

            So far as I am aware 1, 2, 3 and 4 are all acceptable to HMRC; I was told some time ago that 5 is not, but you can check with HMRC.

            Comment


              #7
              Step 3 will (almost certainly) break the mortgage terms and conditions.
              It's not illegal, but you won't be able to do that, and no conveyancer should let you.

              Some mortgage lenders will consent to such a change.
              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

              Comment


                #8
                Originally posted by Lawcruncher View Post
                5. Assign to your wife the income only of the property for a limited period. This does not need the lender's consent.
                Definitely not 5 (if you are implying entering the rental income on one tax return and the expenses on another)

                The whole basis of Form 17 and its surrounding rules is that (for spouses) it is based on actual beneficial (not legal) ownership. If the beneficial ownership is 50% then form 17 is 50%. (for non-spouses the parties can agree to share profits in a manner other than the actual beneficial ownership - but NOT for spouses).

                Comment


                  #9
                  Originally posted by jpkeates View Post
                  Step 3 will (almost certainly) break the mortgage terms and conditions.
                  It's not illegal, but you won't be able to do that, and no conveyancer should let you.
                  It depends on precisely what the mortgage conditions say. If the mortgage conditions prevent dealings wth the beneficial interest there has to be an argument that it is an unlawful restraint on alienation as the lender's security is not affected.

                  If Step 3 breaks the mortgage conditions then so does step 4 as it operates as an assignment.

                  Comment


                    #10
                    Originally posted by Lawcruncher View Post
                    If the mortgage conditions prevent dealings wth the beneficial interest there has to be an argument that it is an unlawful restraint on alienation as the lender's security is not affected.
                    It could result in the lender having to take long and potentially costly legal action in the event of an attempted possession claim as it creates a competing claim on the property.

                    In this case, it's possible the lender might be happy with the arrangement, because of the amount of equity in the property.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Originally posted by Lawcruncher View Post
                      It depends on precisely what the mortgage conditions say. If the mortgage conditions prevent dealings wth the beneficial interest there has to be an argument that it is an unlawful restraint on alienation as the lender's security is not affected.

                      If Step 3 breaks the mortgage conditions then so does step 4 as it operates as an assignment.
                      You could make the same argument about letting a property to a third party via an AST without the lender's consent. That has a similar (? zero) effect on lender's security (but does because it fundamentally changes the use to which the property is used, and also means that the basis upon which the loan was granted is now false and different).

                      Assigning beneficial interest to anything (not just the subject property) also changes the financial health status of the mortgagee and access of the lender to those finances (in much the same way as it would if mortgagee took a massive bank loan, was declared bankrupt, or decided to skip the country without telling the lender). There is more to "security" than the subject property - if that was the only factor then no questions other than the size of the loan relative to the deposit would be asked when granting loans in the first place.

                      Comment


                        #12
                        Originally posted by jpkeates View Post
                        It could result in the lender having to take long and potentially costly legal action in the event of an attempted possession claim as it creates a competing claim on the property.
                        The lender's interest has priority over any beneficial interests. The lender can sell under his power of sale disregarding the beneficial interests and any purchaser takes free of them.

                        Comment


                          #13
                          Originally posted by Lawcruncher View Post

                          The lender's interest has priority over any beneficial interests. The lender can sell under his power of sale disregarding the beneficial interests and any purchaser takes free of them.
                          Yes, but that sale might be at a net loss, and even more so after costs. The property returned might be trashed, or burned down. Which is why the financial viability of the loanee is taken into account at all. If it were so simple and never at the lender's risk mortgages would be granted at the push of a button.

                          And giving a third party beneficial interest of (and income from) an asset is not much different to a huge number of other things the lender is entitled to know about both at the time of the decision to lend and subsequently (like whether I had to take large loans from a loan shark to pay the deposit).

                          Comment


                            #14
                            Guys I am very grateful for the responses but I am none the wiser.

                            So I am happy and accept the risk of divorce etc and would want to transfer beneficial interest of a higher percentage so whatever is most tax efficient.

                            When you say lenders consent, what exactly am I asking these guys, the few times I called Halifax it seems a very scripted response.

                            And does beneficial interest need to be reported to land registry.

                            Page 31 below talks about permissions, does it apply in my situation

                            https://www.halifax-intermediaries.c...conditions.pdf


                            Thanks in advance guys.

                            Comment


                              #15
                              Originally posted by ThePalmist View Post
                              Guys I am very grateful for the responses but I am none the wiser.
                              You need legal advice from a family solicitor.
                              There are lots of other things to consider, which might affect your decision.
                              For example, if you change the ownership of the property, you should also update your wills - which is another cost of making the change you may not have considered.

                              When you say lenders consent, what exactly am I asking these guys, the few times I called Halifax it seems a very scripted response.
                              I think they've already said no, from your post #1.
                              You'd need to change the property ownership and add your wife to the mortgage - which will require the temporary consent to let on your residential mortgage to be exchanged for a BTL mortgage.
                              Which might be necessary anyway as you seem to be planning to let for a while.

                              Again, that adds some costs which affects the "is it worth it?" calculation.
                              And does beneficial interest need to be reported to land registry.
                              No.
                              It probably helps you not to, even though you can.

                              Page 31 below talks about permissions, does it apply in my situation
                              https://www.halifax-intermediaries.c...conditions.pdf
                              Yes.
                              There must be a more "legal" version of the Ts and Cs somewhere, probably pages and pages of small print.
                              But, these terms relate to your current mortgage which is going to be academic if you have to change it.
                              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                              Comment

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