Declaration of Trust mistake made by solicitor 7 years ago?

Declaration of Trust mistake made by solicitor 7 years ago?

by Readers Question

Guest Author

10:09 AM, 23rd December 2022, About 2 years ago 15

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We need some suggestions as to which way we should go next with a mistake made by a solicitor.

Until recently, we owned 2 rental properties, in addition to our own home. I am a higher-rate taxpayer, and my wife is a stay-at-home mum, working a few hours part-time. It made financial sense to have a Declaration of Trust drawn up, to split the ownership and income of both rental properties from joint tenants to tenants in common – with 99% in favour of my wife, and 1% to me. This also reflected the actual ownership. The first flat was owned by my wife before we met (which later was changed to joint tenants when we lived there together), and the second bought by releasing equity from that first flat (again, this was initially owned as joint tenants).

The Declaration of Trust was drawn up by a solicitor in October 2015. It specifically states that properties will be held jointly as trustees and will hold the proceeds of the sale as tenants in common with a 1% share to me and 99% share to my wife. After we signed the declarations, they were returned to the solicitor. They prepared and sent us back a copy of Form 17 to send to HMRC, which we promptly sent along with copies of the Declarations of Trust. The solicitor wrote in their letter that they would register the Declarations with a restriction on the titles with the Land Registry. From that point on, rental income was split 99/1, in accordance with the declaration. In our eyes, everything had been taken care of.

We recently sold one of the flats in November, as like many other landlords we are looking to exit. We used a different firm for the conveyancing. I asked the conveyancing solicitor for their copy of the title after we completed. I had mentioned to them at the very start of the conveyancing process that we had a Declaration of Trust in place. They never said or queried anything about the title, so I took it that all was in order. To my horror, there did not appear to be any restriction about the Declaration of Trust – I spoke to the Land Registry to check and they confirmed that no restriction was ever registered with them, and as far as they were concerned the properties will still owned 50/50 as joint tenants.

I chased the solicitor firm that drew up the Declarations of Trust. After a month of badgering them, they have confirmed that the restrictions were never registered, and have admitted that they are at fault for not doing this. Their solution is to try and inform the Land Registry and have it registered now. I have lost all faith and trust in this firm now, and I feel as though they are looking out for themselves and not us.

This has left me with a number of predicaments:

1. Is the Declaration of Trust still valid from October 2015, even though it was not registered? Do we pay capital gains tax at 99/1 or 50/50 on the sold flat? Going forward, do we split the income 50/50 for the remaining rental?

2. When I spoke to the Land Registry, they said that they could not back-date any restrictions, and they cannot put a restriction on the sold property. If the solicitor registers the restriction now for the remaining flat, will we have to pay the 3% stamp duty surcharge on the 49% transferred?

3. I am worried that I have not paid enough tax. Should I have paid tax on a 50% share of the rental income rather than the 1% I paid? What is the best way of letting HMRC know? We have always tried to do things properly, and have always paid tax when it is due. This is not our doing.

4. The mistake made by the solicitor was over 7 years ago, but only became apparent to us a month ago. If we suffer financial losses, are we too late to make a claim against them? Ideally, I want to ensure we are not out of pocket now, or in the future.

Any suggestions are welcome, this situation is making me feel sick. We don’t know who to turn to for advice.

Thank you.

David


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Comments

Churchills Tax Advisers

10:37 AM, 23rd December 2022, About 2 years ago

I can advise, if you PM by clicking on my membership profile

M K

11:04 AM, 23rd December 2022, About 2 years ago

1. The trust determines the beneficial interest and it is the beneficial interest that determines the rental tax or CGT liability. If the beneficial interest was set at 99:1 and this was shared with HMRC, then HMRC will probably take this in good faith if they were to ever look into it (they probably wont if youve been prompt in submitting your SA and paying your tax). The only reason we register anything with the Land Register is to change from Joint Tenancy (which assumes 50% each) to a Tenancy-in-Common which can stipulate specific percentages such as 99:1 or even 100:0.

2. I dont think there is any stamp duty due when money is not exchanged.

3. As long as you submitted Form 17 at the time, then the rental income should be taxed according to the new beneficial ownership split whatever that is. I dont think HMRC will take a dim view of this if you were not at fault.

I am surprised that the new conveyancing firm did not pick up on the Land Registry issue. Surely if the 50:50 was in effect, then they would have notified you of the capital gains due on your 50%?

The only challenge from HMRC (if they investigate or if you notify them) may be that you were not provided with a completed SEV form (severs the joint tenancy) from Land Registry or via the legal firm, and therefore you should not have assumed the joint tenancy had been severed and replaced with a tenancy-in-common.

4. My guess is that it would only be worthwhile suing the legal firm in the event of HMRC investigating and landing a tax penalty (then you have a specific amount to claim for). But this may never happen, so I wouldnt worry about something that may never happen.

Disclaimer: not a legal or accounting expert!

Simon F

11:34 AM, 23rd December 2022, About 2 years ago

I would suggest you might need to review also your Stamp Duty Land Tax declarations from time of purchase and when you varied ownership %s with DoTs. There is no legal requirement to register DoTs as far as I am aware, but if you have property in a bare trust in a way that alters beneficial ownership then SDLT declarations should have been submitted to HMRC at the time. The SDLT declarations would be documentary evidence to support your position without the LR register entry. SDLT declarations are to be submitted even if capital value too low to generate an SDLT charge.

Troubled landlord

11:43 AM, 23rd December 2022, About 2 years ago

Thanks for the replies. Very helpful. The new conveyancer was recommended by the estate agent dealing with the sale. I couldn't have made it clearer to them we had a declaration of trust in place, so I'm surprised they didn't query the ownership.

I've had a look at the SEV form you mention above. I was never made aware of this. The wording in the letter from the solicitor was that they would be dealing with the Land Registry to finalise things, and no more input was required from us. Perhaps I should have been more clued up.

Thanks for putting my mind at rest. I'm not sure whether to own up and write to HMRC now to get everything squared up - I hate the thought of looking over my shoulder for a number of years hoping not to get a letter. My understanding is that we have 3 years of becoming aware of the mistake made by the solicitor to make a claim.

Hitesh

11:55 AM, 23rd December 2022, About 2 years ago

In any case the old sols have accepted
Liability and you should not be out of pocket.

They will have indemnity insurance and should cover any investigation costs with hmrc if they don’t accept the amendments etc

Will take time to clear up but they’ve been good and accepted their mistake.

Troubled landlord

11:57 AM, 23rd December 2022, About 2 years ago

Reply to the comment left by Simon F at 23/12/2022 - 11:34
Thanks for bringing this up. The solicitor mentioned that no stamp duty was payable at the time on the transfer. I'll check with them that a SDLT declaration was made - my guess is they probably haven't done it.

Olls63

12:09 PM, 23rd December 2022, About 2 years ago

Reply to the comment left by Gone Fishing at 23/12/2022 - 10:37
Isn't the whole point of this site that everyone benefits from the answers?

Simon F

12:37 PM, 23rd December 2022, About 2 years ago

Reply to the comment left by M K at 23/12/2022 - 11:04
Stamp duty would be charged on the value of property changing beneficial ownership, not based on the sum of cash changing hands. But even if the 49% of the flat value falls below the threshold where stamp duty is charged, ie nil payable, an SDLT declaration should be sent to HMRC.

M K

12:41 PM, 23rd December 2022, About 2 years ago

Reply to the comment left by Troubled landlord at 23/12/2022 - 11:43It sounds like the new conveyancing firm took your statement as fact and then didnt bother to look beyond the 99:1 beneficial ownership claim, but I still find it surprising that they didnt confirm this with the Land Registry at which point they would have discovered the 50:50 Joint Tenancy (and then apply the CGT to each of you at 50% ownership). I dont think they can claim reliance on your statement since its their job to check.
The SEV form would require signing by all parties under the Joint Tenancy before it can be submitted to change to Tenancy in Common. So clearly your other solicitor didnt even attempt to file the change.

Mark Alexander - Founder of Property118

12:42 PM, 23rd December 2022, About 2 years ago

You are not required to register a restriction at HM Land Registry. This is an additional form of protection usually entered into by persons who are not married.

Both your income tax and CGT should reflect the Declaration of Trust you entered into.

As the property was jointly owned it was correct to file Form 17 with HMRC. That is what confirms the tax treatment.

For CGT purposes you might have missed an opportunity. Cancelling or amending the DoT and informing HMRC that you are back to 50:50 ownership prior to selling the property would have opened up an opportunity for you both to utilize your annual CGT exemption allowances.

I don’t think you have any basis for making a claim against your solicitor. This is because you have not suffered any losses, save perhaps for paying them to do work they agreed to do which was not done.

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