Declaration of trust from company to individual?

by Readers Question

11:01 AM, 13th March 2017
About 2 years ago

Declaration of trust from company to individual?

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Declaration of trust from company to individual?

A company purchased a property on behalf of an individual (A), who was not able to purchase the property on his sole name for various reasons.company

Can the company create a declaration of trust stating that they are the legal owners, but the beneficial owner is the individual (A)

Thank you

Umesh



Comments

Mark Alexander

19:04 PM, 13th March 2017
About 2 years ago

I don't understand why anybody would want to do this.

The company would have to pay corporation tax on profits made over an above the purchase price (based on valuation) PLUS, the beneficiary would have to pay SDLT (or LBTT in Scotland) on the transfer and all income PLUS, mortgage expenses and profits would then need to go on the beneficiary's tax return. This could result in significantly more income tax being payable, especially if profits plus disallowed mortgage interest and finance charges pushed the beneficiary into a higher rate tax band.
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Joe Norris

19:27 PM, 21st March 2017
About 2 years ago

"The company would have to pay corporation tax on profits made over an above the purchase price (based on valuation) PLUS, the beneficiary would have to pay SDLT (or LBTT in Scotland) on the transfer and all income PLUS, mortgage expenses and profits would then need to go on the beneficiary’s tax return. This could result in significantly more income tax being payable, especially if profits plus disallowed mortgage interest and finance charges pushed the beneficiary into a higher rate tax band."

I'm not sure that all of this is right.

I agree that the company would have to pay corporation tax on profits and future rent would be taxable on the beneficiary. However, there would be no SDLT as there would be no consideration. There is only deemed market value consideration for SDLT purposes when property goes into a company, not when it comes out of one.

In addition, the "elephant in the room" here is that the declaration of trust would be treated as a distribution by the company. It may not be possible to do this at all if the company has insufficient distributable reserves. Worse by far, even if the distribution can be lawfully made, the value of the property would be taxable on the shareholder at dividend rates (up to 38.1%).

If for whatever reason you want the property held by the individual then to avoid all the above you would need to argue that the company acquired the property as a nominee for the individual right from the outset and that it was never the beneficial owner - which may or may not be possible, depending on how the company was funded. If there is any chance of doing this (and there may not be) doing a declaration of trust would be a bad idea, as you would be effectively admitting that the company is currently the beneficial owner. Moving the property out of the company's beneficial ownership would then have all the adverse consequences described above.


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