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Tuesday, 3rd January, 2017

As the deadline fast approaches to submit your 2015/16 tax returns NOW is the time to reconsider your trading status.  This is because property with more than one owner can be accounted for and taxed as a partnership.

HMRC charge tax on the beneficial ownership of rental profit and capital growth from rental properties, HOWEVER, mortgage lenders take their security against legal ownership.  It has been possible to split legal and beneficial ownership of property in England and Wales since the days of the Christian Crusades.

There are three primary tax reasons for creating a partnership by splitting beneficial ownership on rental properties using a Declaration of Trust :-

1. To fully utilise more than one nil rate band and basic rate tax allowance.
2. To utilise more than one annual CGT personal allowance when selling property.
3. After a minimum of three years of submitting partnership tax returns a business partnership can be incorporated without SDLT becoming due (schedule 15 Finance Act 2003).

As the legal title at HM Land Registry does not need to be changed when transferring beneficial interests via a declaration of trust there is no requirement to advise or seek consent from mortgage providers.  This is because their security remains unchanged.  Thousands of Declarations of Trust are arranged by conveyancing solicitors every week.

Forming a partnership with a spouse is often considered most effective as transfers between spouses are exempt from Capital Gains Tax.  However, if you're not married there is nothing to stop you forming a partnership with another party.  Examples include; a child, an unmarried 'partner', a sibling, a parent, a company you already own, another landlord or even a friend.  If you transfer just 1% of the net value of your properties then CGT and Stamp Duty only becomes payable on the 1% transferred.

Once a declaration of Trust has been established all beneficial owners of the property need to complete tax returns.  It is also advisable to submit partnership tax returns just in case you ever decide to incorporate your rental property business partnership.  Full advice on this matter should of course be sought from your financial advisor.


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