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Declarations of Trust
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Chargeable Lifetime Transfers & Potentially Exempt Transfers
Gifts with Reservation of Benefit
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Purpose & Use of Declarations of Trust
The purpose of a Declaration of Trust (also known as a 'Trust Deed') is to set out the separate interests where more than one party owns a particular asset. It may be the case that the parties have decided that their beneficial interests are to be held in equal shares or in disparate proportions and this can be evidenced by a Declaration of Trust.
An example is where a couple have purchased property together but have contributed different amounts to the purchase price of the property thus wish to set out their respective interests in a trust deed.
The making of a Declaration of Trust is often left to the last stage of a transaction. The title register (registered land) or conveyance (unregistered land) very rarely sets out the parties' respective interests in detail and the trust deed fulfils this purpose. All too often however, this last stage is overlooked and the importance of such a deed is appreciated only when disagreement arises between the interested parties or third parties such as HM Revenue & Customs or a trustee in bankruptcy.
It is in these circumstances where the Declaration of Trust proves its usefulness because not only does it regulate the interests of the parties in question, it also acts as evidence of entitlement.
Tax & Declarations of Trust
The following points give a brief overview of some of the tax implications and benefits of a Declaration of Trust.
Income Tax
A Declaration of Trust can be especially useful and relevant in arranging affairs for income tax purposes where property which produces income is held by husband and wife or civil partners.
It is assumed by the Inland Revenue that that income from property held by husband and wife or civil partners should be split into half shares equally. A Declaration of Trust provides evidence to the contrary and the Inland Revenue must be notified within 60 days on Form 17.
Conversely, if no notification is given to the Inland Revenue, then even if the shares are not equal husband and wife/civil partners are taxed on the 50/50 basis which could be useful in providing the wife/husband with an income for tax purposes (at lower rate) even if the asset is owned in disproportional shares.
For non husband-wife/civil partner scenarios, the declaration provides the appropriate evidence for split of the income.
Capital Gains Tax
A Declaration of Trust which disposes of a party's interest in an asset - whether whole or part - constitutes a disposal for Capital Gains Tax (CGT). It is therefore important to be aware of the exemptions and reliefs which are available.
- Spouses living together
Transfers between spouses and civil partners are exempt of CGT provided they are living together in the year of assessment when the transfer takes place. Thus, where the property is held by one spouse/civil partner and subsequently declared to be held by both spouses/civil partners there is not CGT due on that transfer.
- Only or main residence
There is no CGT payable on property which constitutes a person's primary residence throughout the period of ownership. The last 36 months of ownership are disregarded.
Thus, a disposal via a Declaration of Trust in such a case would not incur a CGT charge. - Annual exemption
The annual exemption (currently £9,600 for the tax year 2008/09) is available to all persons holding an interest in property. A Declaration of Trust proves to be useful evidence to be presented to the Inland Revenue in proving the extent of a person's interest.
- Potentially exempt transfer
An absolute gift to someone is a potentially exempt transfer and will not accrue any inheritance tax if the donor survives 7 years after making the transfer.
(Also see Chargeable Lifetime Transfers & Potentially Exempt Transfers). - Husband & Wife/Civil Partners
Provided both husband and wife / civil partners are domiciled in the UK any transfer of assets between them is completely exempt.
- Nil rate band
The first £312,000 of a person's estate is exempt from inheritance tax. Where a husband and wife / civil partners own property as joint tenants, there should be a severing of the tenancy to that of tenants in common to ensure at the very least in the event of an unforeseen common accident, their respective shares pass under respective wills. To prove the extent of their interests, there should also be a Declaration of Trust following the severance.
In a non husband and wife / civil partner situation where a sole owner of property makes a Declaration of Trust in favour of another then the above mentioned points should be considered.
The main point however is that the Declaration of Trust is evidential of the parties respective interests. - Reservation of benefit & Pre-Owned Assets Tax
The Reservation of Benefit rules introduced by the Finance Act 1986 may apply to gifts made by Declarations of Trust. Where property subject to a Declaration of Trust escapes the GWROB rules it may be subject to the Pre-Owned assets tax charge introduced by the Finance Act 2004 with effect from April 2005
See Gifts with Reservation of Benefit and Pre-Owned Assets Tax Charge for further details.
- Stamp Duty
The Finance Act 2004 introduced Stamp Duty Land Tax (SDLT) which is payable on land transactions other than those which are exempt. A Declaration of Trust on land which does not itself give rise to a transfer will not be chargeable to SDLT or require a self certificate.
Inheritance Tax
A Declaration of Trust can result in a chargeable transfer for inheritance tax purposes. Thus, reliefs and exemptions will be looked at here briefly. (For a fuller explanation see Inheritance Tax Exemptions).
