Rental Property - Deed of Trust - Beneficial Interest

[Rinko]

Evening PH massive,

Just in the process of purchasing a BTL property, which is intended to give me wife a small income stream, as she isn't currently working as she looks after our young tribe.

The property is being purchased by both of us as tenants in common, and I would like to transfer the majority of the beneficial interest in the property to my wife via a deed of trust. However I would like to retain an equal division as far as the legal ownership is concerned. I understand that we also need to complete the HMRC form 17 to inform them of the income distribution from the property.

However our solicitor, who is handling the purchase of the property, has said that what I have described above is not possible using a deed of trust and we have to vary the legal ownership to achieve our aim.

I've read what I can on the subject, but I hope someone might have some experience of this which they can share, before I seek out a property specialist to help.

Thanks in advance!

[Claudia Skies]

Basic position:

Joint tenants - (sometimes called ‘beneficial joint tenants’) both have equal rights to the whole property and this is always the situation unless there is something stated by Deed to the contrary. So essentially with two people it's a fixed 50:50 arrangement. The property automatically goes to the survivor if one of them dies. Their Wills have no relevance.

Tenants in common - can own different shares of the property. For instance, the paperwork might say 70:30 when the house is bought. A couple might later decide to change this to 60:40 which can be done by means of a Deed changing the beneficial interests. Each part owner owns their stated percentage and can pass on their share of the property by Will.

It is generally possible to switch between the two approaches with the help of a solicitor as circumstances change. However, if there is a mortgage over the property you may well find that you can't change anything without the consent of the bank.

If you are not happy with the advice you have received from your solicitor you need to contact someone more senior in the firm to raise your concerns, or find another solicitor. I think where you may be going adrift is trying to specify, say, 50:50 and 80:20 at the same time, so you could start by having another conversation with your existing solicitor.

Edited by Claudia Skies on Monday 23 February 22:35

[STattam]

Hi,

HMRC are getting increasingly keen on ensuring that the balance of equitable split matches the income split, i.e the equitable split matches the rental split.

inhope that helps

Spence

[Rinko]

Claudia Skies said:

Basic position:

Joint tenants - (sometimes called ‘beneficial joint tenants’) both have equal rights to the whole property and this is always the situation unless there is something stated by Deed to the contrary. So essentially with two people it's a fixed 50:50 arrangement. The property automatically goes to the survivor if one of them dies. Their Wills have no relevance.

Tenants in common - can own different shares of the property. For instance, the paperwork might say 70:30 when the house is bought. A couple might later decide to change this to 60:40 which can be done by means of a Deed changing the beneficial interests. Each part owner owns their stated percentage and can pass on their share of the property by Will.

It is generally possible to switch between the two approaches with the help of a solicitor as circumstances change. However, if there is a mortgage over the property you may well find that you can't change anything without the consent of the bank.

If you are not happy with the advice you have received from your solicitor you need to contact someone more senior in the firm to raise your concerns, or find another solicitor. I think where you may be going adrift is trying to specify, say, 50:50 and 80:20 at the same time, so you could start by having another conversation with your existing solicitor.

Edited by Claudia Skies on Monday 23 February 22:35

Hi Claudia, I believe understand the situation regarding joint-tenants vs. tenants in common, and this is the reason why we chose the tenants in common to allow us to vary the shares in the property as required. It was really my understanding (or possibly misunderstanding) that the legal ownership and beneficial interest in the property could be held at different percentages via a deed of trust.

I will certainly ask for a more senior solicitor (or a property specialist if required) for their input, but I really just wanted some anecdotal evidence that what I was asking for was even possible.

STattam said:

Hi,

HMRC are getting increasingly keen on ensuring that the balance of equitable split matches the income split, i.e the equitable split matches the rental split.

inhope that helps

Spence

Thanks STattam - is this from your experience, or is there any guidance you can point me towards on the matter? The HMRC's form 17, which I mentioned in my first post, seemed like the means to declare the split for tax purposes (but again I could be misunderstanding it's purpose), without the need to vary the legal ownership/equitable split.

Thanks again for any and all input - really all I want to establish if whether what I believe I can do is possible before I start paying for more senior solicitors.

[trowelhead]

I was also under the impression that however you spit ownership of the property, same % of rental income had to be declared on tax return of the owners.

So 50% ownership of property would mean 50% share of income had to be declared.

Might be wrong - but sure i heard this from the NLA.

[Claudia Skies]

Rinko said:

I believe understand the situation regarding joint-tenants vs. tenants in common, and this is the reason why we chose the tenants in common to allow us to vary the shares in the property as required. It was really my understanding (or possibly misunderstanding) that the legal ownership and beneficial interest in the property could be held at different percentages via a deed of trust.

Yes, as mentioned earlier I think that may be where you are going adrift so just ask the solicitors to explain it again.

With a Tenancy in Common you own what are sometimes called "undivided shares" of the property. Neither person can ever point to a part of the property and say "that bit is mine". The property is held in trust with the two joint owners being the trustees, and when the property is eventually sold they split the cash in whatever way has been agreed and recorded in a Deed. One owner can sell their proportion if they want to, but what they are selling is a proportion of the eventual proceeds of sale rather than a physical thing. The purchaser simply comes in as one of the new Tenants in Common, registered as a joint owner of the property and with the proportion of beneficial interest set out in the Deed.

Hence if you are a Tenant in Common owning 30% of a property you are legally entitled to receive 30% of any rental income and this is what I think HMRC would normally expect you to declare. I cannot comment on whether it's possible to persuade HMRC that the reality is different, but if the reality is different why not change the Deed to reflect that reality?

Technical:

Legal Title - in UK all joint owners always own the "legal title" to property as Joint Tenants. Sometimes they own it jointly for themselves as Joint Tenants both owning 100%. Sometimes they own it as Trustees for people, and those people may well be themselves.

Beneficial Interest - isn't legal title but simply an expression of what proportion of the proceeds of sale will be received by each Tenant in Common if and when the property is sold.

[Eric Mc]

Agreed.

You cannot try to split the ownership for CGT purposes in a different way to the split used for declaring rental income.

One follows the other.

[Rinko]

Thanks everyone, it sounds like the solicitor was correct and my understanding was flawed!

Cheers,

R.

[Mattt]

But if you are married, can she not just purchase it in her name only and then receive all of the income?

I assume you're trying to protect yourself from divorce proceedings, but would it make a difference (especially if you could prove you funded it)?

[trowelhead]

There is a book called "how to legally avoid property taxes" definitely worth a read some interesting stuff in there. You question is covered in there, and contrary to what I put above, the author says you can split the income however you like as long as it is in writing...

[Claudia Skies]

I would urge caution.

Joint Tenants (see my description above) both own the whole property. In this case it would seem reasonable to have a simple piece of signed paper saying how any rental income is to be split. However, note that as Eric has pointed out this can impact into Capital Gains Tax. You can't have things one way for one tax and a different way for another tax. Also, HMRC would be very unlikely to accept a split which keeps changing from year to year.

Tenants in Common (see my description above) already have something in writing which says who owns what proportion of the property and it would be normal for this to be the proportion used for both Income Tax and Capital Gains Tax. (Also Inheritance Tax). I have my doubts whether this proportion can be changed simply by signing another piece of paper. The only way to change what is said in a Deed is by executing another Deed. So I anticipate it would be difficult to persuade HMRC that the income split should be anything different from what has been agreed in the Deed.

Some more on this link, http://taxaid.org.uk/guides/information/rental-inc...

Edited by Claudia Skies on Sunday 1st March 12:02

[anonymous-user]

Rinko said:

Evening PH massive,

Just in the process of purchasing a BTL property, which is intended to give me wife a small income stream, as she isn't currently working as she looks after our young tribe.

The property is being purchased by both of us as tenants in common, and I would like to transfer the majority of the beneficial interest in the property to my wife via a deed of trust. However I would like to retain an equal division as far as the legal ownership is concerned. I understand that we also need to complete the HMRC form 17 to inform them of the income distribution from the property.

However our solicitor, who is handling the purchase of the property, has said that what I have described above is not possible using a deed of trust and we have to vary the legal ownership to achieve our aim.

I've read what I can on the subject, but I hope someone might have some experience of this which they can share, before I seek out a property specialist to help.

Thanks in advance!

You may be overestimating the significance of the legal title - sometimes called the paper title.

The division of the beneficial interest dictates who is entitled to what share of income (eg rents) and capital (eg on a sale). In short, the beneficial interest division defines the money division.

Holding the legal title gives the right to convey the property to a third party, give a good receipt for the purchase price, receive income, and so on. Think of it as an administrative role. When the legal title holder(s) receive monies derived from the property, their obligation is to distribute that money to the holders of the beneficial interest in accordance with the division of the beneficial interests.

A declaration or deed of trust can spell out what percentages each beneficial owner is entitled to.

What would be the problem with you being joint tenants as far as the legal title goes but tenants in common so far as beneficial ownership goes (say 70/30) under a deed of trust?