Declaration of Trust and mortgage buy to let

by Readers Question

7:43 AM, 7th April 2016
About 3 years ago

Declaration of Trust and mortgage buy to let

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Declaration of Trust and mortgage buy to let

Hello, I am owner of a flat (alone) which I bought few years ago. I would like to buy a new flat with my wife, my current flat will be then let. Declaration of Trust and mortgage buy to let

I need to convert my current flat to a “Buy To Let” (to borrow some more equity).

I am additional tax payer (45%) while my wife is basic (20%).

I have a very simple question, if you could help.

If I understand well, as my wife will take care of this flat (organize viewing, taking care of tenants etc.) I can do a declaration of trust so my wife has 99% of my current flat and me 1% and we will pay tax accordingly on the rental income. However, does this need to be done before I remortgage this flat (alone) or should I do this trust and then remortgage with both names, even though she is not on the deeds?

If I remortgage it now, does my lender need to take into account both financial situations or only mine? If I remortgage later, after the trust, will my lender check mainly her income and not on mine to rely on reimbursement?

Can I do a mortgage only on my name even there is this declaration of trust?

In the case the mortgage and the deed are on my name but there is this declaration of trust, can we still deduce the 99% interests paid from the gross income (with future law – for 2016/2017 it’s still fine)? Also, will the 40K letting relief apply for both of us when we sell?

Is there any other to optimize the situation (and to avoid to pay SDTL) ?

Further, I will be subject to the new tax 3% SDTL on my new flat. Is there a way to pay it on the value of my current and not the new? As I will do Buy to Let on this one and not on the new one which will be my main residence, it’s quite unfair that I am taxed on the new flat which will be double of the old. Will I be entitled to claim back this tax back in 2 years if I sell the current flat even I have done a BTL for 2 years?

Thanks

Tim



Comments

Mark Alexander

8:10 AM, 7th April 2016
About 3 years ago

Hi Tim

Your question is a very interesting brain teaser. It's far from being the "simple question" you thought it was.

Here are some of my considerations:-

1) You could transfer the existing property solely to your wife at a zero consideration. This is perfectly acceptable in law between married couples and very common practice. There would be no CGT or SDLT implications as transfers between spouses are exempt due to the base cost for CGT purposes being retained at the original base cost value. What we do not know is whether your wife would qualify for a BTL mortgage in her own name. This is because we know nothing about her other than that she's a 20% tax payer. You would need to seek mortgage advice.

2) If you do the above I am not sure how this might affect PPR relief and Letting Relief for CGT purposes at the point of sale. I recommend you to seek professional advice from an accountant on this point.

3) The point on whether an additional 3% SDLT would become payable on the new property is also complex. The question asked by HMRC is "how many properties will you own at the end of this transaction". If the answer is two or more then you will pay the extra 3% SDLT. However, based on what I said at 1) above, YOU may only own one! You haven't said whether you own any more. If you don't then you need both a good accountant and a good solicitor, each of which need to be very experienced in property tax. See our tax and legal sections for recommendations.

4) With regards to brokers, check our member section and do a search for Mark Edwards. His background (many years ago) was tax inspector so you may wish to consider him to be a "gamekeeper turned poacher". I've known him for over 10 years, he's one of the most successful brokers in the UK. If you search this website for his name you will also find some articles he's written.

The above doesn't even touch on the Declaration of Trust questions you have asked, but given that you will be refinancing anyway, I can't really see why a Declaration of Trust is necessary if it is possible to get the right properties into the right names for the right reasons, i.e. the most advantageous tax position.

You may end up spending a few 000's to get the professional advice required to set this up optimally but good advice should always cost you significantly less than it ultimately saves you. I think your situation is a classic example of where this would be the case.
.

Judith Southall

10:31 AM, 7th April 2016
About 3 years ago

what if you set up a limited company and lease your property to the company on a peppercorn rent, can you then put all the expenses including mortgage interest through the limited company as an expense.
all you then have to declare is the peppercorn rent you are receiving on your tax return.

Mark Alexander

10:39 AM, 7th April 2016
About 3 years ago

Fine if you have no mortgage and prefer to pay corporation tax.

However, if you do have a mortgage the tenancy between you and your company would likely breach the mortgage conditions. Further, where would the money come from to pay the mortgage? If it's in the company then you would have to pay to tax to get it out. Given that you wouldn't be making any profit on the BTL either you wouldn't have anything to offset the 20% mortgage interest relief against.

In short, BAD IDEA.
.

Judith Southall

10:52 AM, 7th April 2016
About 3 years ago

Reply to the comment left by "Mark Alexander" at "07/04/2016 - 10:39":

if the limited company leased the property from the owner, at a peppercorn rent, the rental income from the tenant would be paid to the limited company, and all the expenses including the mortgage interest would be paid from the limited company- if you got agreement from your mortgage company, why is this a bad idea ?

Mark Alexander

10:58 AM, 7th April 2016
About 3 years ago

Reply to the comment left by "Judith Southall" at "07/04/2016 - 10:52":

The lease would not compel the company to pay the mortgage and you would never get lenders consent either.

We did ask our Barristers to consider a more complex variation on this theme whereby the rent is assigned to a company in consideration of the company taking over all liabilities of the individual. However, Counsels opinion was that this would not work either on the basis that the consideration would remain liable for tax by the individual.
.

Judith Southall

11:07 AM, 7th April 2016
About 3 years ago

Thank you for your advice.... start thinking again....

Mark Alexander

11:17 AM, 7th April 2016
About 3 years ago

Reply to the comment left by "Judith Southall" at "07/04/2016 - 11:07":

It's best to leave the thinking to the professionals. There are several ways to restructure that work efficiently, please see the link below for example ...
.

Judith Southall

11:20 AM, 7th April 2016
About 3 years ago

Reply to the comment left by "Mark Alexander" at "07/04/2016 - 11:17":

Yes I agree, I am a professional 'accountant'
will have a look at the links
thanks

Tony Lilleystone

16:07 PM, 7th April 2016
About 3 years ago

Here’s an extract Q&A from the guidance note on the new SDLT (not SDTL) rates published by HMRC, which looks relevant to your case.
Q1. I am purchasing a new main residence but intend to retain my current main residence, convert it to a buy-to-let mortgage and rent it out. Will I have to pay the higher rates of SDLT on the purchase of my new main residence?
A1. Yes, the higher rates will apply as following the purchase you will own an additional residential property. However, if you sell your previous home within 3 years of the purchase of the new one you will be able to claim a refund from HMRC.
(For the full notes see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/509184/GuidanceNote_Final.pdf)

Sunny K

19:09 PM, 7th April 2016
About 3 years ago

Hi Tim,

I am trying to design a strategy in similar situation to avoid SDLT and have something which might be possible. How about you sell your current flat to a limited company with you and your wife being shareholders. You will not pay CGT but will pay 3% SDLT on this transfer. You will now have disposed your main residence and don't need to pay additional SDLT on new higher value flat purchase.

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