A Declaration of Trust, also known as a Deed of Trust, is a crucial legal document for individuals co-owning property. It outlines the precise ownership share each party holds in the property, which can significantly impact financial and tax obligations, especially in scenarios involving rental income from jointly owned properties.
Purpose of a Declaration of Trust
The primary purpose of a Declaration of Trust is to clarify the ownership proportions of a property among its joint owners, which is especially relevant in situations where contributions towards the purchase price or ongoing costs are not equal. This clarification is essential for tax purposes, as HMRC typically assumes a 50-50 ownership split in the absence of a specified agreement.
Tax Implications and Benefits
A Declaration of Trust can lead to tax efficiencies by aligning the distribution of income with the owners' tax positions. For couples with differing income levels, allocating a larger share of property income to the lower earner can reduce the overall tax liability, as demonstrated in the example of John and Komal:
- John, a lower earner, and Komal, a higher earner, co-own a rental property.
- Without a Declaration of Trust, HMRC assumes they each receive 50% of the rental income, leading to higher taxes for Komal due to her higher tax bracket.
- By signing a Declaration of Trust and accompanying Form 17, they can allocate the rental income to John, optimizing their tax liability.
Flexibility and Broad Applicability
Declarations of Trust are not limited to married couples or civil partnerships; friends or family members co-purchasing property can also use them to set out their ownership stakes according to their contributions or agreed terms. The split does not need to be equal and can be tailored to any arrangement that suits the co-owners.
Capital Gains Tax Considerations
When it comes to selling the property, a Declaration of Trust also allows for strategic planning around Capital Gains Tax (CGT). Co-owners can adjust their shares to utilize each person's CGT allowance effectively, ensuring tax efficiency upon disposal of the property.
Conclusion
A Declaration of Trust is a powerful tool for anyone co-owning property, whether with a partner, friend, or family member. It provides a clear legal framework for ownership shares, facilitating tax planning and ensuring fairness in the distribution of property income and Capital Gains. Understanding and utilizing this document can lead to significant tax savings and protect the interests of all parties involved.
