Declaration of trust with wife to reduce tax liability?

[Madmax86]

Hi all

I'm new to this forum so please be gentle

Background

I am sole owner of a BTL property (which is mortgaged).

I plan to assign 99% of the beneficial interest to my wife via a Declaration of Trust to use up her tax liability. I am a high-rate tax payer and she doesn't work.

I'll still be the legal owner.

Now my assumptions are as follows....

• The mortgage lender doesn't need to know about the declaration of trust, as it's only for tax purposes
• I don't plan on having any restrictions on the title as it's only for tax purposes, so Land Registry doesn't need to be notified
• It is a simple document that is only required to send to your accountant

My questions

1. Are my assumptions above correct?
2. Who is the best person to produce this document? A solicitor or an accountant (or even DIY?)
3. For those that have done it this way, have there been any complications further down the line, maybe when it comes to remortgaging?

Happy to hear of any other things to watch out for if I have misunderstood anything.

I look forward to reading your comments.

[jpkeates]

Are my assumptions above correct?

No.
It will almost certainly be a breach of your mortgage lender's terms and conditions.
And it's not a technical issue, you are about to give away 99% of the property you have used as security for a large loan.
That's probably a fraud.

The most common way of achieving what you want involves splitting the title so you and your wife own the property as tenants in common - which your lender would have to consent to, as they have a charge on the property.
It is possible to set up a different kind of trust that doesn't require a change in title, but that is a more complex process and requires a trust to be registered with HMRC, usually with an annual tax return of its own. (and the admin might offset the tax saving).

Whatever you do will have to be notified to HMRC to be effective, not simply sent to your accountant.

A trust isn't a paper exercize, you will be giving 99% of the property to your wife in real life.

Who is the best person to produce this document? A solicitor or an accountant (or even DIY?)

You can DIY, but I definitely wouldn't - and if you split the title, you'll want to change your wills etc.

For those that have done it this way, have there been any complications further down the line, maybe when it comes to remortgaging?

You'll need to have a joint mortgage with your wife.
When you transfer a property to your wife and they join a mortgage, that's technically a sale, and is a tax event for CGT.

[AndrewDod]

1. No, Yes, No
2. I'd get a solicitor
3. One of you could die, you could have a fight, you could get divorced, one of you could be sued. The mortgage company will likely penalise you if they find out, or refuse you a later mortgage as will other companies. There are many circumstances under which they might find out.

You will need to send the DoT to HMRC as part of your Form 17 submission.

[Madmax86]

Thanks for the responses

By the way, I purposely left out the fact that I knew it would be in breach of the lender's T&C's, just wanted to see what type of responses I get.

I've spoken to quite a few solicitors regarding this and the majority advise there is no need to tell the lender. I am fully aware that if anything happened, it is not the solicitor that would be liable but myself. However from what I've gathered so far, it seems the likelihood of the lender finding out is very slim so based on this I've decided I'm happy to take this risk.

No.
The most common way of achieving what you want involves splitting the title so you and your wife own the property as tenants in common - which your lender would have to consent to, as they have a charge on the property.

Yes this was plan B if the declaration wouldn't work.

A trust isn't a paper exercize, you will be giving 99% of the property to your wife in real life.

Sure, but not if I'm only transferring the beneficial interest.

[Madmax86]

1. No, Yes, No
2. I'd get a solicitor
3. One of you could die, you could have a fight, you could get divorced, one of you could be sued. The mortgage company will likely penalise you if they find out, or refuse you a later mortgage as will other companies. There are many circumstances under which they might find out.

You will need to send the DoT to HMRC as part of your Form 17 submission.

Thanks for your comments.

A form 17 won't be required as my wife's name is not currently on the title. Form 17 is for joint owners only.

I've heard many threats and scare stories in my time around what happens when lenders find out you are in breach of terms. From what I've actually seen in reality is they switch you onto a new product, or in this case, get my wife added on to the title. I've never come across a real experience where they've called in the loan or something significant.

Now that's not to say it won't happen, but in my experience and doing a risk assessment on the situation, I'm happy to take that risk.

[jpkeates]

By the way, I purposely left out the fact that I knew it would be in breach of the lender's T&C's, just wanted to see what type of responses I get.

I've spoken to quite a few solicitors regarding this and the majority advise there is no need to tell the lender. I am fully aware that if anything happened, it is not the solicitor that would be liable but myself. However from what I've gathered so far, it seems the likelihood of the lender finding out is very slim so based on this I've decided I'm happy to take this risk.

The lenders pay a lot of money (to experian I think) to monitor this kind of behavior.
I wouldn't be so confident, it's a huge risk for what's usually a relatively small saving in tax.

Having a loan called in and not being able to get a mortgage for the rest of your life is quite a downside.

And any solicitor who gives advice like that is to be avoided.
They might be OK to say that they are not compelled to report the change to a lender, but should be advising you to check the lender's terms to see if you have to.
And, if it turns out that you do, to tell you to do so.

Sure, but not if I'm only transferring the beneficial interest.

That's the important element of the ownership, the title's basically just the admin.
If you and your wife were to divorce, she could demand that the title be changed and you'd have to comply.
If she died, the beneficial ownership is part of her estate.

[AndrewDod]

Sure, but not if I'm only transferring the beneficial interest.

I'm afraid you don't understand the meaning of beneficial interest (= actual ownership).

You cannot in any event split income in the way you want with you with wife without actual ownership (not legal title) and HMRC need proof of that. You think HMRC don't communicate with banks eh?

[AndrewDod]

A form 17 won't be required as my wife's name is not currently on the title. Form 17 is for joint owners only.

Again, you simply don't understand (or have been advised by an advisor who hasn't a clue).

[Madmax86]

Ok so to clarify, are you both in agreement that the only way to do what I'm proposing is via tenants in common as below?

The most common way of achieving what you want involves splitting the title so you and your wife own the property as tenants in common - which your lender would have to consent to, as they have a charge on the property.

Do you also both subscribe to the fact that a declaration of trust can never work as it is is breach of a lender's conditions and if permission is requested, they will almost certainly decline it because they don't know anything about the wife and her earnings and want her on the mortgage and title?

[jpkeates]

Mr Dod and I don't know each other in real life, so it's hard to know how we'd agree that each other's views are correct or not.

The most commonly used mechanism of a declaration of trust and form 17 requires that you are tenants in common, yes.
The deed of trust simply then lays out the percentage of beneficial ownership, which is the source of tax liability.

Your lender's consent will be required for a change of ownership, because they will have a charge on the property requiring that.

They may simply agree (it depends on the mortgage product and how much equity is in the property), but are more likely to require your wife is on the mortgage to agree.
This is both prudent and probably generates more income for them.

There are more complex forms of trust where ownership and income allocation can be varied, but I haven't any experience of such a mechanism between a husband and wife only and whether it would be acceptable to HMRC.
They're more commonly used to avoid IHT.

[AndrewDod]

I'm pretty sure I disagree with jpkeates about a bunch of stuff...

Imagine the following:
a) - You don't put your wife on the legal title
b) - You create a deed of trust to split the beneficial interest in the property 99:1

You CAN do a+b above

c) You then submit Form 17 to HMRC attaching this deed of trust (you have to do that for this to work)

Possible bad outcomes

- HMRC inform your bank

- Your wife suspects (wrongly) that you are sleeping with the neighbour. She files for divorce. She will own 99% of the property. Your bank will certainly get involved in the fallout. You will owe the bank a lot of money but will have lost your asset (as far as your wide is concerned, but the bank will think differently). Bank will take the property and you will owe a lot of cash to wife to re-purchase it.

- Wife dies. Property will form part of her estate. You will have informed HMRC via form 17. Even if her will is drafted in your favour (which it might not be in the future) the bank will likely be involved in the fallout.

- You lose your job and can't pay the mortgage. Wife refuses to return the 99% or pass over income (which she is entitled to do). Bank will get involved.

- Some foolish future politician decides to create a 5% wealth tax on all assets minus outstanding mortgage. They will definitely get the data they require from HMLR and banks and existing HMRC records.

[Madmax86]

I'm pretty sure I disagree with jpkeates about a bunch of stuff...

Yes but I was just referring to this particular example only.

c) You then submit Form 17 to HMRC attaching this deed of trust (you have to do that for this to work)

As previously stated, Form 17 only applies if you are married AND own the property as joint tenants. You said previously I don't understand but it seems you don't understand. Please see this link and read the answer under the heading 'Can I split rental income with my wife?' for more information.

Yes you can, however the Form 17 process is only for married couples who are joint legal owners of a property. If you are the sole legal owner of a property and want to share rental income with your wife, but not add her to the legal title then this is the process:

Possible bad outcomes

- HMRC inform your bank

Yes, potentially.

- Your wife suspects (wrongly) that you are sleeping with the neighbour. She files for divorce. She will own 99% of the property. Your bank will certainly get involved in the fallout. You will owe the bank a lot of money but will have lost your asset (as far as your wide is concerned, but the bank will think differently). Bank will take the property and you will owe a lot of cash to wife to re-purchase it.

I agree this could be messy but she won't own 99% of the property. I still own 100% of the title. As there is no restriction on the title, I should be within my rights to sell it.

- Wife dies. Property will form part of her estate. You will have informed HMRC via form 17. Even if her will is drafted in your favour (which it might not be in the future) the bank will likely be involved in the fallout.

She doesn't own any part of the property

- You lose your job and can't pay the mortgage. Wife refuses to return the 99% or pass over income (which she is entitled to do). Bank will get involved.

- Some foolish future politician decides to create a 5% wealth tax on all assets minus outstanding mortgage. They will definitely get the data they require from HMLR and banks and existing HMRC records.

Both potential but highly unlikely

[AndrewDod]

Again you don't understand the basic principles.

Beneficial ownership is not the same as legal ownership. You might be on the title, and as the trustee you can sell it but 99% of the proceeds have to go to your wife. If that doesn't happen she will sue you (and definitely win). You can be on the legal title and yet not own anything at all.

There is no contradiction wrt form 17. You can only split the income from a property jointly owned with a spouse if the spouse ACTUALLY OWNS the share (as per the split), ***AND** you complete a form 17. If there is no actual ownership you cannot split it at all. If you don't actually own it in unequal share you can't submit form 17 (because it is irrelevant -- because you cannot split the income).

If you are actually being advised please fire your advisor.

[jpkeates]

I agree this could be messy but she won't own 99% of the property. I still own 100% of the title. As there is no restriction on the title, I should be within my rights to sell it.

Beneficial ownership is the real ownership.
If you manage, through whatever process, to transfer 99% beneficial ownership to your wife she will be the real owner of 99% of it.

Tax follows the beneficial ownership - which demonstrates its priority over title.

You would only be within your rights to sell it with her consent and she would be entitled to 99% of the proceeds.
It would be a tax fraud if that isn't how the proceeds were split.

She doesn't own any part of the property

Yes she does and you will have confirmed that to HMRC.

However, I agree that in what you are proposing Form 17 is not applicable.

My wife and I have transferred the beneficial ownership of a rental property to my son via a trust.
He receives all of the income from it (and is taxed accordingly) and he would receive all of the proceeds of any sale, which he could veto.
He is not on the title deeds of the property.
That trust is formally registered with HMRC and there is an annual "no activity" return required each year.

I am not sure that this would be possible between a husband and wife though - because I am not sure HMRC would accept the arrangement.
But, even if they did, you can't get away from the fundamental requirement that the beneficial ownership has to be real to be affect tax.

[Madmax86]

Ok I see now what you are saying about the beneficial ownership and that if something was to happen (e.g. divorce), she would walk away with 99%. I stand corrected!

There is no contradiction wrt form 17. You can only split the income from a property jointly owned with a spouse if the spouse ACTUALLY OWNS the share (as per the split), ***AND** you complete a form 17. If there is no actual ownership you cannot split it at all. If you don't actually own it in unequal share you can't submit form 17 (because it is irrelevant -- because you cannot split the income).

I found this paragraph hard to read. I think we both agree though that form 17 doesn't apply here.

Beneficial ownership is the real ownership.

My wife and I have transferred the beneficial ownership of a rental property to my son via a trust.
He receives all of the income from it (and is taxed accordingly) and he would receive all of the proceeds of any sale, which he could veto.
He is not on the title deeds of the property.
That trust is formally registered with HMRC and there is an annual "no activity" return required each year.

I am not sure that this would be possible between a husband and wife though - because I am not sure HMRC would accept the arrangement.
But, even if they did, you can't get away from the fundamental requirement that the beneficial ownership has to be real to be affect tax.

That is very familiar to what I am trying to do but yeh fair enough, I agree it may not work.

These following articles state clearly what I'm trying to do..

https://www.ts-p.co.uk/news/rental-i...ife-receive-it
https://www.samconveyancing.co.uk/ne...-property-8197