Declare or Be Damned!

15th November 2011

HMRC Trusts & Estates has recently published new guidance on the taxation of income from property. Most significantly, whilst HMRC have previously only asked for evidence of beneficial ownership in the case of bank and building society interest, this requirement will now apply in respect of all types of property.

The new guidance is particularly relevant to couples who receive rental income from property, which is being declared as the income of the partner who is a lower or basic rate tax payer. For example, in the case of husband and wife, it is not uncommon for the legal title to 'buy to let' property to be held in the sole name of the husband (especially if they are the higher earner and a mortgage was required), or held in joint names, but rental income is then declared as belonging to the wife, so as make use of her personal allowance and marginal tax rates.

HMRC's updated Form 17 (Declaration of beneficial interests in joint property and income) and the accompanying guidance states that evidence of beneficial interests must in future be submitted along with the completed form. Therefore, where there is a difference between the legal title to the property and the way in which the income is being declared, a deed called a 'Declaration of Trust' will need to be prepared by a solicitor and signed by both parties.

A Declaration of Trust is a simple form of trust, which essentially states that although the legal title is owned by one or both parties, the beneficial interests (i.e. the right to receive income) is held by the party wishing to declare it on their tax return. The Declaration of Trust can be amended later in the event of a change in circumstances and the parties should normally receive appropriate advice on this at the time of entering into the Declaration of Trust.

HMRC guidance and a link to the new Form 17 can be found at http://www.hmrc.gov.uk/trusts/agents/updates-tsem.htm For advice on and the preparation of Declarations of Trust please contact Nicola Plant or other member of the Pemberton Greenish LLP Private Client Team direct on 020 7591 3333.