Legal & beneficial ownership
From a tax perspective, there is a distinction between legal and beneficial ownership. The legal ownership of a property is whoever the Land Registry owner is, and if the property is mortgaged, who the mortgagee is. However, it is the ‘beneficial’ owner of a property that is taxed on the property income.
Types of ownership
There are two ways in which more than one person can own a property, either as:
Joint tenants – whereby each is deemed to own an equal share in the property. When one owner dies the property is automatically transferred to the other joint tenants in equal share. The legal rights of the surviving parties to a joint tenancy override a will.
Tenants in common – where the share of each owner is separate, may be unequal and can be disposed of in lifetime or on death as the respective owner wishes.
A joint tenancy ownership can be changed into a tenancy in common ownership at a later date, but a tenancy in common cannot be changed into a joint tenancy.
It is suggested that whenever a married couple purchase a property together they do so as tenants in common and sign a declaration of trust. They can then submit a form 17 election even if it is wished for the 50:50 tax split to be used, the reason being that once the election is made it can be changed whenever required; without it, nothing can be done.
With a property owned by unmarried parties the tax follows the beneficial ownership rather than legal ownership.
This does not mean that the rental profit or loss must be allocated in the same proportion as the underlying beneficial ownership. Rather, the owners can agree a different split as they see fit, the proportion referring to profits and losses only and not necessarily to the capital received should the property be sold.
Where a married couple or civil partners hold income-producing assets such as rental property, there is often a desire to reduce their combined tax bill by adjusting the split of income between them. For example, where a couple own a rental property and one partner is a basic rate taxpayer and the other a higher rate taxpayer, ensuring that the lower earner is entitled to more of the rental profits will help to reduce their overall tax bill.
HMRC will always assume spouses own a 50/50 share in all property unless you tell them otherwise. This is referred to as the deeming rule.
If you want to change the way in which rental income is allocated between you, you will both need to sign what’s called a ‘declaration of trust’ in respect of each property. HMRC also need to be
Informed using form 17.
Unequal ownership can only be achieved if the property is held as tenants in common and is not effective if the couple hold the asset as joint tenants.
Making a declaration using form 17 overrides the deeming rule. That means each of the couple is subject to income tax on their actual beneficial ownership.
The declaration can be made at any time. But it is important to note that the declaration only applies to income arising from the date of declaration. It cannot be backdated to change the tax position in previous years.
The declaration will take effect from the date that the last spouse signs it, provided that the form is submitted to HMRC within 60 days of that date. If the form is submitted late, the declaration is invalid and a new one must be prepared.
The declaration of trust can be amended later in the event of a change in circumstances, so that the beneficial interests are again held equally, or otherwise. This might also be relevant if you later want to sell the property and use both your annual allowances for capital gains tax purposes.
What other issues need to be considered?
Changing the ownership structure might affect:
Care should be taken to review any lender’s terms and conditions regarding any declaration of trust, as lenders have differing approaches to the concept of a declaration of trust.
Particular care should be taken if the couple are leaving their assets to different beneficiaries.
Capital Gains Tax (CGT)
CGT is payable whenever a person makes a ‘capital disposal’ i.e. either sells a property or transfers a property to another legal person However, spousal transfers are treated as being on a ‘nil gain nil loss’ basis, and so there is no CGT due on transfers of capital assets between spouses, whether this is a legal or a beneficial transfer.
Stamp Duty Land Tax (SDLT)
When the beneficial ownership of a property is transferred from one legal person to another, it is important to consider whether the transfer would create a SDLT liability for the individual increasing its beneficial ownership in the property.
For example, transfers between spouses are not ordinarily subject to SDLT. However, if the transfer results in a transfer in the value of the mortgage between the parties, it is likely that SDLT will be due depending on the level of debt transferred. If however there is no change in the mortgage liability despite the change in the beneficial ownership, no SDLT will be due.