Divorce, Declaration of Trust, and Beneficial Ownership?

Divorce, Declaration of Trust, and Beneficial Ownership?

11:53 AM, 28th February 2022, About 4 months ago 21

Text Size

Hi all, In brief, this is the background of my situation:

I Own 2x BTL properties as tenants in common with my now ex-wife, split as 80/20 %.
There is an existing Declaration of Trust which splits the income 80/20 as well, in her favour.
Properties both have a small mortgage on them – approx. £52K on each BTL.
Property values are in the order of £240, 000 each
We have a financial consent order (FCO) which has been sealed by the court.
The financial consent order grants me the 2 BTL properties.
FCO was granted on 18th Feb 2022, and decree absolute granted on 24th Feb 2022.
The FCO states that I must indemnify my former spouse against payments or charges related to the mortgage, if she cannot be released from the current mortgages.
The FCO states that I must indemnify my former spouse against current/future CGT liabilities.

Issues:
We have 56 days to complete the directions in the FCO.
The end of the current tax year is looming, and so we must execute the property related transactions prior to 5th April 2022 in order to take advantages of the tax breaks regarding CGT, within the current tax year of divorce.

Option 1:
Transfer legal ownership of properties to my sole name, and obtain the permission of the mortgage company to remove my ex-wife from the mortgage.

Option 2:
Leave legal ownership as is, and execute a further declaration of trust, making me the beneficial owner of the income and underlying property assets.

Pro/Con
Option 1:
Requires the mortgage company to release my ex-wife from the mortgage
Requires me to pass financial affordability tests with current lender – I’m 3 years into a 5 year fix – so would prefer not to redeem mortgage. I work as a contractor, and so this could present a hurdle with my lender in terms of fitting their standard lending criteria.
This option would slow down matters, and I may miss the 5th April deadline which would be catastrophic for me in terms of CGT.
It keeps things tidy, as I would be transferring both legal and beneficial ownership to my sole name.

Option 2:
As I am not changing the legal ownership at HM Registry, only the beneficial ownership, I do not need to get my lender involved.
It’s going to make the process quicker to execute.
It leaves things slightly messy, as whilst I would be 100% beneficial owner, the underlying legal ownership is still split 80/20 in favour of my ex.

Questions:
For option 2, what I do not know is:

a) What are the CGT implications of doing this in terms of future sale of the properties?

b) As am only changing beneficial ownership not legal ownership, would this mean I would need to obtain my ex-wife’s consent for any future sale?

c) Would my ex-spouse have to update her will to pass legal ownership onto me in the event of her death?

d) The FCO which has been sealed by the Courts and awards me 100% of BTL properties, does this give me sufficient protection further down the road, if I go option 2 route?

e) For both options, as this transfer is in connection with a divorce, so long as I complete within the current tax year, should the transaction be free of SDLT?

f) My assumption for both options, is that legal ownership and beneficial ownership are separate, and that in terms of CGT liability – HMRC is only interested in beneficial ownership, not legal ownership?

g) As the FCO gives us both 56 days from 18th Feb to execute the property transfers (which would take us past the 5th April), does the FCO alter how HMRC would
look at the matter in terms of CGT and SDLT, so long as everything was completed within the 56 day limit specified?

Finally, are there any other options I haven’t considered, which I perhaps could consider or any other immediate of future pitfalls?

I’m not expecting all my questions to be fully answered but I would like to know from Mark, given this background, is this something his tax planning consultation would cover?

Thanks in anticipation of any help and guidance.

Paul



Comments

Ian Cognito

12:11 PM, 4th March 2022, About 4 months ago

As I understand it, if you want the income split TO BE DIFFERENT FROM the (beneficial) ownership split, you must notify HMRC via Form 17 or maybe via your tax return. It cannot be retrospective.
By default, beneficial ownership is the same as legal ownership, unless altered by a Declaration of Trust.

Simon Lever View Profile

17:48 PM, 4th March 2022, About 4 months ago

Reply to the comment left by Ian Cognito at 04/03/2022 - 12:11
NO, NO and NO!

Ian Cognito you are totally wrong

There can only ever be 2 ways of splitting the income on a property owned by husband and wife.

By default it is 50:50 and this is applied automatically.

By election it can be on the basis of the underlying ownership, if different. This election is notified to HMRC by form 17.

There can be no other split of income in any other ratio.

Only by changing the underlying owneship can the ratio be changed.

Ian Cognito

18:08 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Simon Lever at 04/03/2022 - 17:48
Are you saying Simon that if ownership is as Tenants in Common with, for example, a 70/30 split (declared either in the title, or, more usually, in a separate Declaration of Trust) the default position for splitting income is still 50/50 and not 70/30?

If so, I disagree.

Chris Bradley

18:12 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Ian Cognito at 05/03/2022 - 18:08
The default is 50:50 unless you notify HMRC using form 17 that you wish income to be split in accordance with ownership share. And form 17 must be sent within 30 days of when the change is to take place. No form 17 then HMRC assumes 50:50

Ian Cognito

18:51 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Chris Bradley at 05/03/2022 - 18:12
OK Chris, and what would the default position be when there are 4 owners (husband, wife and two adult children)?

Chris Bradley

19:02 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Ian Cognito at 05/03/2022 - 18:51
The assumption by HMRC of a 50:50 split applies to married couples and people living together as a couple, and a form 17 is needed to change to split on profits to match ownership share.

If the property is owned by people who are not in relationships the 50:50 split assumption doesn't apply, and there is more freedom on the allocation of profits which can be different to ownership share, but care must be taken if some of the owners are spouses as the assumption can apply to their share without a form 17

Ian Cognito

19:11 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Chris Bradley at 05/03/2022 - 19:02
Are we in agreement that a split of 49/49/1/1 would default to that for income, where husband and wife have equal shares?

Chris Bradley

19:33 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Ian Cognito at 05/03/2022 - 19:11
In your example yes
If the spouses owned 10:50 and the children owned 20:20 this could raise the HMRC assumption to the 60% parents income being assumed at 30:30 without a form 17

Ian Cognito

19:38 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Chris Bradley at 05/03/2022 - 19:33
Thanks Chris. So Form 17 must be used to split income unequally between spouses. Can the unequal split be anything other than as per ownership?

Chris Bradley

19:40 PM, 5th March 2022, About 4 months ago

Reply to the comment left by Ian Cognito at 05/03/2022 - 19:38
I don't believe so, it's a unique situation between spouses, and spouses can give ownership to each other much easier than non spouses.

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now