Guidance

HMRC Guidance

HMRC have detailed guidance and manuals both for their staff and the general public. Some of this documentation can be overwhelming. We have reproduced salient elements of their guidance with specific relevance to deeds of trust and we hope this information will help you in determining your tax position.

As mentioned elsewhere on the site we are not regulated to provide tax advice, we offer the information here purely as guidance and we take no responsibility for its accuracy or application.

Introduction

In general law there are two types of ownership – legal and beneficial. if the legal owner and the beneficial owner are not the same person, the legal owner holds the property on trust for the beneficial owner. Where there is joint ownership of property, there is always a trust.

The guidance covers the position under the law of England and Wales only. The position for individuals living in Scotland will be governed by Scots law, and may be different. The Scottish legal system is distinct and separate from that in England and Wales so some of the legal concepts and terminology used in this guidance do not apply in Scotland. The position for individuals living in Northern Ireland may also be different.

Ownership of property comprises:

  • legal ownership
  • Beneficial ownership

The same person may be both legal owner and beneficial owner of the property, but there can be a separation of the two.

Legal Owner

The legal owner is the person/s in whose name/s the property is held or registered. ‘Legal owner’ includes a trustee.

Land and buildings – the legal owner is the person/s in whose name/s the property is held or registered in the Land Registry (in England and Wales).

Beneficial Owner

The beneficial owner is the person for whose benefit the property is held. It is distinguished from the person in whose name the property is held (the legal owner).

‘[beneficial ownership] means ownership for your own benefit as opposed to ownership as trustee for another.’ (J Sainsbury plc v O’Connor 64 TC 208)

The beneficial owner is sometimes referred to as having a ‘beneficial interest’ in the property.

Legal and Beneficial Ownership

The starting point is that the legal owner is presumed to be the beneficial owner unless there is evidence to the contrary.

In the case of Stack v Dowden [2007] 2 All ER 929, Baroness Hale of Richmond, who gave the leading judgment, commented on the general principle that ‘The onus is upon the person seeking to show that the beneficial ownership is different from the legal ownership’ and ‘The burden will be on the person seeking to show that the parties did intend their beneficial interests to be different from their legal interests, and in what way. This is not a task to be lightly embarked upon.’

The separation of legal and beneficial ownership:

Clear indication by name

In some cases it will be made clear that the legal owner is not the beneficial owner.

The simplest example is where property is held by ‘A as trustee for B’. A is the legal owner (trustee), B is the beneficial owner. A trust in these terms is a bare trust. Or property may be held in the name of ‘A as nominee for B’. ‘Nominee’ is a bare trustee. Again, A is the legal owner, and B is the beneficial owner.

Declaration of trust

The legal and beneficial ownership of property may be separated by a valid declaration of trust.

Examples

1. Property is said to be held in B’s name for A. If there is a valid declaration showing that B purchases the property in B’s name for and on behalf of A, and so long as there are no other conditions, A is the beneficial owner of the property. B would be the legal owner, and a nominee or bare trustee, holding the property on trust for A.

2. A decides to transfer beneficial ownership of property A has purchased to B while still holding it in A’s own name. If there is a valid declaration showing that A has in fact assigned beneficial ownership of the property to B, then A is the legal owner and B is the beneficial owner.

Ownership Income

The starting point is that whoever has beneficial ownership of the property (or part of the property) has beneficial ownership of the income (or the respective part of the income).

For example, if A has a beneficial interest in 75% of the property and B has a beneficial interest in 25%, you start from the basis that A is entitled to 75% of the income and B is entitled to 25%.

The direct correlation between property and income may be varied, for the starting point above not to apply there must be a separation of income from property, by way of a valid declaration or deed of trust.

For example, in an interest in possession trust, the trustees own the trust property, but they are not entitled to the income arising from the property – the beneficiary is. By way of a valid deed, the settlor has specifically given the income from the property to the beneficiary. So the presumption that income follows property does not apply in this instance.

For example, A owns property from which income is received. A wishes to transfer the right to income to B while retaining the legal and beneficial ownership of the property itself. A executes a valid deed assigning the income to B. In law, B is entitled to the income even though A still owns the property. So the presumption that income follows property does not apply in this instance. Note that where the right to income has been transferred and the transfer is not on arm’s length terms the Settlements legislation may apply.

Joint Ownership

Legal ownership

Property may be held in joint names, so that there is more than one legal owner – for example, property held in the name of ‘A and B’. A and B are the legal owners.

Beneficial ownership

In England and Wales property held in joint names may be held beneficially in either of two ways:

  • as joint tenants
  • as tenants in common

The beneficial ownership position in each type is as set out below.

Joint Tenants

Property is held in the name of A and B. A and B are the legal owners.

In a joint tenancy, A and B are jointly entitled to the whole of the property. There is no division of the property. If one of the joint tenants dies, ownership passes automatically to the surviving owner.

Because of the survivorship rule, this form of ownership is the way that most married couples or civil partners are likely to own property, although for IHT planning purposes couples may later in life separate or ‘sever’ the joint tenancy into shares/tenancy in common, for example by giving notice of severance. The surviving joint tenant can also sever the joint tenancy by way of an instrument of variation.

Joint tenancy is less likely where a property is held in the name of more than two individuals or by individuals not in a personal relationship – tenancy in common is more likely to apply.

Tenants in Common

Property is held in the name of A and B. A and B are the legal owners.

In a tenancy in common, A and B are each entitled to a specific share in the property. The shares in which the property is owned may or may not be equal. For example A is entitled to 50% and B to 50%; or A is entitled to 75% and B to 25%. When property is held in this way, on the death of one tenant in common the deceased’s share does not pass to the surviving owner. It forms part of the deceased’s estate, and so passes to their successor under the terms of their will or the rules of intestacy.

Words of separation or ‘severance’ are likely to be used. These are words that indicate the property is to be held in shares, for example ‘equally’, ‘in equal shares’, ‘half and half’, ’50/50’, ‘one third/two thirds’, ‘60%/40%’.

Tenancy in common is the way that individuals who are not in a personal relationship are likely to own property. It would be unusual to find that they intended the survivorship rule to apply.

Presumption of Joint Tenancy

Where property is held in the joint names of ‘A and B’, it is presumed to be held beneficially as joint tenants.

This presumption can be displaced by evidence to the contrary, such as:

  • A declaration of trust of equal or unequal shares. For example, if there is a valid declaration that the property is held 25% for A and 75% for B.
  • In the case of real property, there is a restriction in Land Registry Form A. This restriction usually means that there is a tenancy in common instead.
  • Notice of severance of the joint tenancy by one of the joint owners.
  • An act of severance – such as the bankruptcy of one of the owners or one owner taking out a loan secured on the property.
  • Evidence of a resulting or constructive trust.

If there is such evidence, the ownership is as described as Tenants in Common and not Joint Tenants.

Income Tax Principles

Taxation of income is based on beneficial ownership, not legal ownership.

For income tax purposes, you need to know who is the beneficial owner of the income, that is, who is ‘entitled to’ the income.

Receiving or entitled to?

There is specific tax legislation in ITTOIA 2005 saying who is liable for tax on income:

  • S271 for rental income
  • S371 for interest
  • S385 for dividends and other distributions
  • S581 for income from intellectual property, for example royalties.

For rent, interest and income from intellectual property the legislation says that the person liable for income tax is the person receiving or entitled to the income.

The ‘receiving’ basis enables you to tax the person in receipt of the income, even if you cannot trace the person entitled to it. But ultimately you want to tax the person who is entitled. For example, in an interest in possession trust, the trustees are initially taxable on the trust income because they receive it. But the beneficiary is ultimately taxable on the trust income because he or she is entitled to it. So you tax the beneficiary on the income on the ‘entitled’ basis, and give credit for any tax paid by the trustees who received it.

In summary, for the purpose of taxation of income, you want to establish who is ‘entitled to’ the income.

Exceptions

There are two exceptions to the ‘receiving or entitled to’ principle described above.

Settlements legislation

The legislation at Chapter 5 Part 5 ITTOIA at ITTOIA/S624 provides that where the settlor retains an interest in a settlement, he or she is taxable on the income arising under the settlement. Settlement is defined broadly to include, ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’. A settlor retains an interest if there are circumstances in which the settlor, and/or a spouse or civil partner of the settlor may benefit from the property and/or income of the settlement.

The legislation applies to tax the settlor on the income of the settlement even if the settlor does not receive the income and is not entitled to it.

Jointly held property – married couples and civil partners

ITA/S836 provides that where a married couple or civil partners living together hold property in their joint names, they are treated for income tax purposes as beneficially entitled to the income in equal shares. The consequence is that they are taxable in equal shares.

S836 applies regardless of the actual receipt or entitlement position of the married couple or civil partners. The couple can however ask to be taxed on their actual entitlement in certain circumstances.

Joint Ownership

Where the property is held in the joint names of a married couple or civil partners, see the section relating to this below. Otherwise, the following rules apply.

Joint tenants

Property is held in joint names of A and B. In a joint tenancy, A and B are jointly entitled to the whole of the property. There is no division of the property or the income between the named owners. A and B are jointly entitled to the whole of the income.

For income tax purposes, you tax the income on the joint owners equally. If there are two joint tenants, you tax them on one half each. If there are three owners you tax them on one third each. However, as explained earlier, it is unlikely that there will be more than two joint tenants.

Tenants in common

Property is held in joint names of A and B. In a tenancy in common, A and B are each entitled to a specific share in the property. For example A is entitled to 25% and B to 75% of the property. The general rule is that A is entitled to 25% of income, and B to 75%. The income tax position is that A is taxable on 25% of the income, and B is taxable on 75% of the income.

HMRC Guidance on Claims

Below is an extract of specific guidance given to HMRC staff:

You may get claims that, while property is held in A’s name, it is owned by B, or that B is entitled to all the income. A common feature of such claims is that B is taxable on income at a lower rate than A, and/or has personal allowances to use. Some claims will be acceptable, others will not.

The taxpayer you are enquiring into would be A, who has potentially understated income. In some cases, B may have already paid tax on the income. In such a case, if A is ultimately taxable on the income, B may make an overpayment relief claim subject to the normal rules.

The arguments put forward about income tax may differ from those put forward about ownership of property for non-tax purposes. For non-tax purposes, often the claimant asserts that the property belongs to them, whereas for income tax purposes the (higher rate) taxpayer is likely to claim that the property (or income) does not belong to them. The cases that this guidance is concerned with involve two or more parties together alleging that a certain beneficial ownership of property or income exists. The parties are in agreement, but HMRC may disagree.

You will need to establish whether the alleged transfer of beneficial ownership of property or income ever took place, but note that the onus is on the taxpayer/s to prove that the beneficial ownership is different from the legal ownership.

Some examples are also provided to illustrate the potential claims:

Examples of income tax claims include:

  • Property is held in A’s name. A says s/he has transferred beneficial ownership of the property to B, who should be taxed on all the income.
  • Property is held in A’s name. A says the property is beneficially owned by A and B, and so the tax due on the income should be split between them.
  • Property is held in A’s name. A says s/he is the legal owner of the property but claims that B provided part of the cost, so B should be taxed on part of the income.
  • Property is held in A’s name. A says s/he still owns the property but has transferred the right to all of the income to B, so B should be taxed on it.
  • Property is held in the name of A and B. A claims that the property is beneficially owned by B only, so B should be taxed on the income.
  • Property is held in the name of A and B. A claims that B provided part of the cost, so B should be taxed on part of the income.

Property is held in the name of A and B. A claims that the income belongs 10% to A and 90% to B, so B should be taxed on 90% of the income.

There may be other variations – examples of various claims and explanations of the correct treatment are given in the examples section below.

Express Trusts - Written Declarations

Express Trusts

An express trust is usually created by a declaration of trust which is made by the legal owner. This declaration can be written or oral (sometimes called ‘parol’) except in the case of land where the trust needs to be evidenced in writing under S53(1)(b) Law of Property Act 1925.

In a claim that an express trust exists, the first thing to ask is whether there is a written trust.

A written trust is usually made by deed, but it does not have to be. It may be made by a declaration. See below for explanations of written declarations of trust and deeds.

Written Declaration

A trust must have three certainties. They are certainty of

  • words (intention to create a trust)
  • subject (the property and beneficial interest/s in the property)
  • object (the person/s having the beneficial interest/s).

A declaration of trust must be made in such a way that the words make clear what the settlor intends, and identifies with certainty the property and the interest/s in it.

A simple declaration is enough evidence that a bare trust exists.

Example – written declaration of bare trust

“I John Smith declare that I hold the property described as XXXXX for my son David Smith absolutely”

or

‘I John Smith declare that I hold the property described as XXXXX on trust for my son David Smith’

The declaration is signed by John Smith and dated. There is no need for the beneficiary even to be aware of the declaration of trust, so David’s signature is not required.

There is no ambiguity in the use of ‘declare’. Either of the above declarations means that John holds the property as trustee for David. David has the beneficial interest in the property and is entitled to the property and any income derived from it.

This is a bare trust. The use of the word ‘absolutely’ in the first example means that there are no conditions attached. A declaration does not have to say ‘absolutely’ – if nothing is said after ‘David Smith’ as in the second example, then ‘absolutely’ is implicit.

So long as there are no conditions, you can usually accept a declaration in the above form as being effective as a bare trust from the date it is signed. An example of a condition might be that David is required to attain the age of 25 before he becomes entitled to his interest in the property. If there are any conditions present, this is not a bare trust.

There is nothing in the above declarations to indicate that either is a deed.

A declaration of trust is usually a statement by the legal owner of property that s/he holds the beneficial interest for someone else. S/he is not transferring the legal title. The beneficiary has an equitable interest created by the declaration which can be enforced by the courts. The donor/trustee does not need to register the trust with the Land Registry, nor does the document require delivery or a witness to signatures.

The trust will become enforceable from the date the declaration is executed, but such a document on its own does not prove that the trust existed prior to its execution. Evidence would need to be provided to show that the trust did exist before the declaration of trust was made in writing.

Deed

Although there is no legal requirement for a declaration of trust to be made by deed even where more complex trusts are created, in practice such trusts are usually created by deed. In a trust or settlement deed, rather than the legal owner declaring that s/he holds the beneficial interest for someone else, s/he may appoint trustees of the property, and set out the trusts on which it is held in the trust deed.

In this scenario, the legal owner will also need to transfer the legal title in the property to the trustees by whatever means is appropriate for the particular property. For example if the trust relates to land, the legal owner will need to complete a land registry transfer to the trustees.

A document is not a deed unless it makes clear on its face that it is intended to be a deed by the person making it, whether by describing itself as a deed or expressing itself to be executed or signed as a deed.

A deed will be valid only if it signed by the parties to it. The parties are the settlor and the trustee/s. A deed must be signed in the presence of a witness who ‘attests’ (affirms) the signature(s). A deed no longer requires sealing – Law of Property (Miscellaneous Provisions) Act 1989).

A trust declared under deed is effective only from the date the deed is delivered to the trustees, because without the deed the trustees have no way of administering the trust until they know of its terms. Similarly trustees cannot carry out their duties as trustees until they have control of the property.

Married Couples and Civil Partners

Property held jointly by married couples or civil partners

The guidance here applies specifically to the taxation of

  • income arising from property
  • held in the joint names of two individuals who are
    • husband and wife, or
    • civil partners of each other
  • and are living together.

There are special rules in ITA/Sections 836 and 837, which are explained in the following sections.

Explanation of Terms

Property

‘Property’ includes land and buildings, savings accounts, shares and intellectual property.

Held in the names of individuals who are married to, or are civil partners of, each other

A married couple or civil partners may hold property separately, or in their joint names. The use of ‘names’ means this legislation applies only to property held in joint names.

If property is held in the name of only one spouse or civil partner the special rules do not apply.

Where a husband and wife or civil partners are entitled to property and the income from it, but the property is held in the name of a nominee, then it’s not ‘property held by a married couple or civil partners. living together’, and the special rules do not apply

Sometimes a married couple or civil partners hold assets jointly with others. The 50/50 rule does not apply in such cases. It applies only to income arising from property held in the names of individuals who are married to, or who are civil partners of, each other, and who live together. That excludes for example, a bank account held in the name of Mr and Mrs A and Mr B.

Living together

The meaning of this phrase is as given in ITA/ S1011:

Individuals who are married to, or are civil partners of, each other are treated

for the purposes of the Income Tax Acts as living together unless:

  • (a) they are separated under an order of a court of competent jurisdiction,
  • (b) they are separated by deed of separation, or
  • (c) they are in fact separated in circumstances in which the separation is likely to be permanent.

Where a married couple or civil partners are separated the separated spouses or civil partners are taxed on their actual entitlement to income.

Rules

There are two rules about property held jointly by married couples and civil partners:

  • the ‘50/50 rule’ (ITA/S836) whereby most income from jointly held property is treated as split equally between the two spouses or civil partners for income tax purposes; the 50/50 rule applies unless there is a valid declaration on form 17;
  • the ‘form 17 rule’, whereby, if the true income split is different from 50/50, the couple can opt to be taxed on that basis for income tax purposes (ITA/S837);

The 50/50 rule: 50/50 rule and exclusions

Income from property held jointly by married couples and civil partners is treated as beneficially owned by the individuals in equal shares under ITA/S836. Consequently they are taxable on the income 50/50. This rule applies even if the individuals own the property in unequal shares. It can be disapplied only by a declaration on form 17 under ITA/S837. Full details of how the 50/50 rule operates in practice are given below.

There are some specific exclusions from the 50/50 rule about income. The 50/50 rule does not apply to

  • income to which neither of the individuals is beneficially entitled
  • partnership income
  • income arising from the commercial letting of furnished holiday accommodation
  • income from jointly held shares in a close company
  • income in relation to which a declaration by the individuals under section 837 has effect (unequal beneficial interests)

Form 17 Rule

Married couples and civil partners can, in certain circumstances, ask to be taxed on their actual entitlement to income from jointly held property. They do this by making a joint declaration of unequal beneficial interests and submitting it to HMRC. A valid declaration under ITA/S837 overrides the 50/50 rule in ITA/S836. In the absence of a valid form 17 declaration, the 50/50 rule applies.

The declaration must be made on form 17.

A form 17 declaration must be made jointly. If one spouse or civil partner does not want to make a declaration both must accept the standard 50/50 split for jointly held property.

Who can make a declaration?

A form 17 declaration (ITA/S837) to opt for an unequal split of income for tax purposes applies only to property that would otherwise be subject to the 50/50 rule (ITA/S836).

A married couple or civil partners who have separated would not be subject to the 50/50 rule, as it applies only to couples living together. They will be taxed on their actual entitlement in any event, and so cannot make a form 17 declaration.

Individuals other than spouses or civil partners cannot make a form 17 declaration, for example siblings. The 50/50 rule does not apply to them. Income is attributable to them on the basis of their entitlement.

Declaration is optional

A couple do not have to opt for a different split. A couple could accept the standard 50/50 split for jointly held property, even if one spouse or civil partner holds 90% of the capital and income and the other spouse or civil partner holds 10%.

A couple can make a different choice for each asset. In some cases they can choose to be taxed on their actual entitlement; in others they can accept the standard 50/50 basis.

The couple do not have to make a declaration as soon as they get a new asset.

Beneficial Interests

ITA/S837 refers to ‘unequal beneficial interests’.

A form 17 declaration must correctly state the individuals’ beneficial interests in

  • the jointly held property and
  • the income arising from the property

A form 17 declaration can be made only if the individuals are beneficially entitled to the income in unequal shares. This could be 100/0 or 60/40 or anything other than 50/50.

Declaration must reflect reality

Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where

  • each spouse or civil partner is in fact entitled to a share other than 50/50 in the property and
  • the share that a spouse or civil partner has in the income is the same as their share in the property

A declaration cannot be made where a husband and wife or civil partners own property as beneficial joint tenants. In these circumstances the couple do not own the property in shares at all, but are entitled jointly to the whole of both the property and the income. This is distinct from the situation where the husband and wife or civil partners own property as beneficial tenants in common where they are each entitled to specific shares in the property and the income arising.

Evidence

Where married couples or civil partners elect not to be taxed 50/50, the normal rules of beneficial ownership apply.

The couple should submit evidence of beneficial ownership along with the declaration. This applies to all types of property. Form 17 declarations should be considered in the light of the evidence submitted.

How couple make declaration

A declaration can be accepted only if made on form 17. The taxpayers can download a copy from the HMRC website.

The form must be signed and dated by both spouses or both civil partners, but can be sent to the tax office of either spouse or civil partner.

The declaration sets out the property and income they want the declaration to cover and states the interest each spouse or civil partner holds in

  • each item of property
  • the income produced by each item.

Once a declaration is made it remains in force until the couple’s interests in the property or income change, or they stop living together as a married couple or as civil partners of each other.

No split other than 50/50 can be accepted until a satisfactory declaration is received.

Property not covered by declaration

A declaration applies only to the asset or assets shown on it. Other property, including any assets bought later, is not covered.

Further change in beneficial interests

A couple might declare that their interest in property is split 60/40. Later their interests change so that they hold it 80/20. If they wish they may make a fresh declaration to reflect the new split. But it must reflect the actual position.

No limit on number of declarations

There is no limit on the number of declarations. Any number of declarations may be made to cover

  • new joint holdings
  • old joint holdings that have previously been dealt with on the standard 50/50 basis.

Couples may make numerous declarations in a year if they are constantly buying or selling investments in their joint names and holding them in unequal shares. In practice couples with a big turnover of assets may prefer to avoid joint holdings.

However, the declarations must reflect the actual position.

When declaration takes effect: normal case

Income from property included in the declaration is split in the new way from the date of the declaration (which is the date the declaration was signed by the last spouse or civil partner to sign) provided the notice of declaration reaches the Inspector within 60 days of the date it was signed. See below about late and lost declarations.

For example, the husband signs on 10 June 2010, and the wife signs on 20 June 2010; the declaration applies to income that arises on and after 20 June 2010 provided the declaration reaches the Inspector within 60 days of 20 June 2010.

A declaration that is late is invalid; it has no effect at all. The couple must make a further declaration and send it to the Inspector within the 60 day time limit if they want income to be split on the basis of actual entitlement. Only income that arises after the date of the declaration is covered.

Strict time limit

The declaration must be given to the Inspector within 60 days of the date of the declaration.

The declaration time limit of 60 days must be enforced strictly. There is no power to extend it. Since difficulties might arise only many years later – perhaps when the couple split up – you must make sure the notice of declaration is valid at the outset.

When a declaration stops

The split of income for tax purposes produced by a valid declaration goes on running for all later years without any further action until one of the following events happens

  • one spouse or civil partner dies
  • the couple separate permanently
  • the couple divorce or the civil partnership is dissolved (where the couple have not already separated permanently)
  • the beneficial interest of either spouse or civil partner in either the property or the income it produces changes; for example, this can happen if one spouse or civil partner transfers any part of his/her beneficial interest to the other or to a third party.

The couple cannot simply choose to end the split of income which results from a declaration; it goes on running until one of the four events listed above occurs. But even the smallest change of interest (4 above) stops the declaration running. The standard 50/50 rule then applies again unless the couple make a fresh declaration.

Death, separation and divorce or dissolution

After death, permanent separation or divorce or dissolution the income is split in the normal way; that is, the person who is beneficially entitled to the income is taxable on it.

Married couple or civil partners continue to live together

Where a married couple or civil partners continue to live together but their beneficial interests change there are three possibilities

  • the property is still held in joint names and no declaration is made: the standard 50/50 rule continues to apply after the date of the change
  • the property is still held in joint names and a fresh declaration is made: the income is split in the way set out in the new declaration; the new split applies from the date of the new declaration
  • the property is no longer held in joint names: from the date of the changes normal principles apply; if, say, one spouse or civil partner has become the absolute owner of the income and capital then all the income is assessed on him or her.

HMRC action on receipt of form 17

HMRC stamp the form with the date of receipt in the official use box as soon as it is received. That is because the declaration is valid only if received within 60 days of the couple signing it.

Preliminary checks
  • signatures and dates – check that the couple have both signed and dated the declaration; if not send it back with a letter asking them both to do so
  • time limit -check that the declaration is within the time limit. If it is, enter the date the form was received in the ‘Date received’ space in the official use box on the form. That confirms that the time limit has been met. If not, do not complete the ‘Date received’ box. Send a letter explaining that the declaration is not valid, and send a fresh form 17 inviting the couple to make another declaration if they wish
  • percentages – check for each item of property separately, that the percentage share that a spouse or civil partner has claimed in the income box for that item is the same as the percentage share he or she has claimed in the property box for that item. If they are not, write to the couple telling them that the declaration cannot be accepted for that item and explain why.
Evidence checks
  • Check that the couple have submitted adequate evidence of their claim that the property is held jointly in unequal shares. If they have not, you may need to ask them to provide further evidence.
Declaration accepted

If the declaration is signed and dated, meets the time limit, has otherwise been completed satisfactorily, sufficient evidence of the beneficial ownership has been provided, and you can see no reason to refer the case to HMRC Trusts & Estates Technical Edinburgh

  • initial the ‘Declaration accepted’ box in the official use box on the form
  • if the other spouse or civil partner has a tax office, send a copy to that office
Declarations delayed or lost in post

The couple is expected to allow sufficient time for the declaration to reach you by post. A notice of declaration may not reach you within the 60 day time limit but the couple claim that it was posted in time. The position is this: Section 7 of the Interpretation Act 1978 provides that ‘service is deemed to be effected by properly addressing, pre-paying and posting a letter containing the document and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post ‘.

The onus is therefore on HMRC to prove that the notice was not given in time if both spouses or civil partners say it was sent by ordinary post within a reasonable time before the end of the 60 day period.

Accordingly you should

  • accept that the notice was given in time unless there is very good reason for doubt, but
  • ask the couple to give you another copy of the declaration if the original does not arrive.

Overview of Tax on Property

Legal Title

Section 52 Law of Property Act 1925 (LPA) provides that any transfer of legal title (conveyance) of land is void unless made by deed. A conveyance after 2002 needs to be registered with the Land Registry. The Land Registry documents provide evidence of who holds the legal title. A copy of Land Registry form TR1, in use from 1 April 1998, can be seen TR1

There is unlikely to be any dispute about the registered legal owners. In cases where the ownership is in dispute, the Land Registry entry should be examined to ascertain the legal owner(s).

Express Trusts

For someone to claim a beneficial interest in land and buildings, there must be something in writing to prove it. Section 53(1)(b) of the Law of Property Act 1925 sets out the requirements for the creation of an express trust or interest in land and buildings:

“a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such a trust or by his will.”

This says a trust of land needs to be ‘manifested’ in writing signed by the settlor, not that the declaration needs to be in writing. So the declaration itself could be oral provided there is evidence in writing signed by the settlor that the declaration is made. The evidence must show that a trust is intended to exist and the nature of the beneficial interests, for example a simple declaration by A that he holds the land on trust for B would suffice.

Joint Ownership

A maximum of four persons can be registered as legal owners in the register of land (S34 Trustee Act 1925).

When property is held jointly, there is a presumption in law that the property is held as joint tenants.

Where property is purchased for investment purposes it is likely that a joint tenancy will be rebutted by evidence that the investors wanted their investment to pass under the terms of their will in the event of death rather than to the surviving owner/s.

Land Registry form TR1 provides a box for joint-transferees to declare whether they are to hold the property on trust for themselves as joint tenants, or on trust for themselves as tenants in common in equal shares, or on some other trusts which are inserted on the form. If this is complied with, you can accept what it says. (The transfer will be valid whether or not this part of the form is completed.)

Taxation of Rental Income

For the taxation of rental income from property held jointly by married couples or civil partners, see the sections above. Otherwise, the following applies.

Profits from UK and foreign land and buildings are treated for tax purposes as arising from a business (PIM1020). Under ITTOIA/S268, income tax is charged on the profits of a property business. Under ITTOIA/S271 the person liable for the income tax under S268 is the person receiving or entitled to the profits.

In the context of rental income, the ‘property’ from which the income derives may be the actual land or building itself or it may be a lease.

Examples

See below for some examples illustrating the principles about ownership and joint ownership of property described above with respect to land and buildings.

Legal owner not as claimed

A flat is rented out and the rents are paid to A. A claims that the rent from the flat should be taxed half and half on A and her husband B. A says she has transferred the flat into joint names with B. But the Land Registry record clearly shows that A is the sole owner. It is also established that she was the sole borrower of the loan from the building society.

There is no evidence that the beneficial ownership of the property or the income is held to any extent by B.

Joint ownership is not in point here. The property is not held ‘in joint names’, so ITA/S836 is not relevant. That section refers to ‘property held in the names of a husband and wife etc’.

A is taxable on all the income.

Valid declaration of trust

A house is held in the sole name of A, and the Land Registry documents confirm this. The house is rented out, but the rents are received by B, A’s adult daughter.

A submits a written declaration of trust dated 01/06/06 and signed. In it A states ‘I hold the house at 23 Ranley Gardens on trust for my daughter B absolutely’. The declaration is valid.

The declaration transfers the beneficial ownership from A to B on 01/06/06 and she is entitled to the rents, and taxable on them, from that date. However, if the daughter was a minor the Settlements legislation may apply so that A would remain taxable on the rents until the daughter reached 18.

Settlements legislation

A house is held in the sole name of A, and the Land Registry documents confirm this. The house is rented out and the rents are paid to A. A claims that all the rent is taxable on his wife B.

A produces a ‘trust deed’. A claims the ‘trust deed’ transfers the right to income to his wife. But even if the trust deed does validly transfer the right to all of the income from A to B, that would constitute a settlement of the right to income, because A would still retain an interest in the property itself. Consequently the settlement would be caught by ITTOIA/S624 and all the income would remain taxable on A.

Joint ownership is not in point here. The property is not held ‘in joint names’, so ITA/S836 is not relevant. That section refers to ‘property held in the names of a husband and wife etc’.

Sole name: contributions by A and B – resulting trust

A provides £150,000 by way of bank loan in his sole name and B provides £50,000 cash for the purchase of a house. Both contributions are documented. The land registry documents show that the house is held in the name of A alone. The house is rented out.

A is the legal owner, but says there is a resulting trust.

If there are no counter presumptions, there is a resulting trust such A and B own the property beneficially in accordance with their contributions – A holds 75% and B holds 25%.

Consequently A is entitled to 75% of the rent and is taxable on 75%, while B is entitled to 25% of the rent and is taxable on 25%.

Sole name: contributions by A and B but loan by B – no resulting trust

A provides £150,000 by way of bank loan in his sole name and B provides £50,000 cash for the purchase of a house. The Land Registry documents show that the house is held in the name of A alone. The house is rented out.

A is the legal owner, but says there is a resulting trust such that B is taxable on 25% of the income.

However, there is evidence that the £50,000 cash provided by B was a loan to A, which A has agreed to repay over 5 years. The presumption that the property is to be held in shares is ‘rebutted’, and A is the sole beneficial owner.

All the rents are taxable on A.

Sole name – no resulting trust

A has held a flat in his sole name for years. It is rented out. A claims that his new wife B, a non-taxpayer, is the beneficial owner of the flat and is consequently taxable on all the rental income, using up personal allowances etc. A says that because B has paid some repair bills on the flat and has redecorated it, there is a resulting trust to B and she is the beneficial owner of the property, and should be taxable on the income.

However, to establish a resulting trust there must be a direct contribution to the purchase of the property. There is no evidence that B contributed to the purchase of the flat – in fact A did not even know her at the time of the purchase. Paying bills and redecorating do not constitute direct contributions to the purchase price of land and buildings.

Consequently, A remains beneficial owner of the flat and the income, and is taxable on all the rent.

Sole name – taxpayer claims constructive trust

A purchased a house as an investment. The house was registered in his name alone and he provided the purchase money by way of a mortgage. His wife B does not work and has no other income. A is a higher rate taxpayer.

The rental income is returned by A and B each on a 50/50 basis.

As is usual in these income tax cases, there is no conflict between the taxpayers, but HMRC may disagree with them.

Taxpayer’s position

A says that S53(2) Law of Property Act applies. The requirement for a trust in respect of land and buildings to be in writing is removed where there is a resulting, implied or constructive trust. He says that there is a constructive trust in which B has a beneficial interest in the property. A says he and his wife agreed at the outset that the property was to be owned jointly, and there is therefore a ‘common intention’.

A says that B has demonstrated ‘detriment’ in that she was relying on the arrangement in that she expected to share in the proceeds of any sale.

HMRC’s position

ITA/S836 does not apply because the property is not in joint names, so the general principles apply.

The house is in the sole name of A. He is the sole legal owner, and presumably the sole beneficial owner, unless there is evidence to the contrary.

In the case of land and buildings, S53 Law of Property Act 1925 applies. For B to have a beneficial interest there must be a resulting or constructive trust in her favour.

B cannot claim an interest by way of a resulting trust because she has not contributed to the purchase price.

HMRC does not agree that a constructive trust arises, because no evidence exists of any agreement made at the time of purchase to share the beneficial ownership in the property. Nor has a common intention to share ownership been inferred from the conduct of the parties over the whole course of dealing with the property.

There is no detriment because B has not given anything away or significantly changed her position.

A is entitled to all the income, and is taxable on it.

Sole name – Settlements legislation

A and B are civil partners. A is a higher rate taxpayer, and B has no taxable income.

A purchased a house in his sole name. It is rented out. A does not return the rents, and says that he has transferred the right to all the rents to B.

ITA/S836 does not apply, because the property is not in joint names.

Even if there is a valid declaration showing that A has effectively transferred the beneficial interest in the income to B, the Settlements legislation applies to deem the rents to belong to A. A has ‘retained an interest’ if the property or income may be applied for the benefit of A or A’s civil partner. The exception for outright gifts to spouses or civil partners does not apply because only the right to income has been transferred – not the underlying property.

Joint names of husband and wife – 50/50 rule applies

A house is purchased in the joint names of A and B, a married couple who live together. The house is rented out. A is a higher rate taxpayer, B does not work and has no income. A does not return any rents – B returns them all and they are covered by personal allowances, etc.

A and B have not submitted Form 17.

As the house is in the joint names of husband and wife living together, ITA/S836 applies – the income is taxable 50/50.