Simon Howley considers the implications of using a deed of trust document when incorporating a property portfolio.
Whenever there is the issue of how co-owners may hold property, the issue of entering into a declaration of trust will be raised. It is always advisable to enter into such a document to:
- confirm the extent of their respective beneficial interests; and
-
set out any express terms that the co-owners want to include.
Registration at Land Registry and HMRC
A declaration of trust is not registrable at HM Land Registry, as it is not possible to register a notice in respect of an interest under a trust of land. This means that the trust document is not available for public inspection.
In some cases, trustees must provide information about trusts and their beneficiaries to HMRC's trusts registration service (TRS). Co-ownership trusts where the trustees and the beneficiaries are the same persons are exempt from registration.
Income tax and capital gains tax
For income tax and capital gains tax (CGT) purposes, any profits and losses arising from the property will be treated as accruing directly to the relevant co-owners according to their beneficial shares in the property.
Spouses and civil partners are generally entitled to the income in equal shares unless they opt for taxation on a different basis corresponding to their beneficial interests or exclusion applies.
Mortgaged properties
As the incorporation of a property portfolio usually consists of the transfer of all property from individuals to a nominated company in consideration for shares in that company, it is also customary that any existing lending needs to be refinanced. The issue here, of course, is that this may trigger early redemption penalties or may mean moving to a new mortgage product with a higher interest rate.
Individuals and some advisers therefore try and find ways to avoid this issue, but there can be severe ramifications for the unwary.
Is the lender's consent required?
If the property is subject to an existing mortgage, the parties should consider whether the lender's consent is needed before the declaration of trust is completed.
The form of mortgage should be checked in case it prevents the transfer of not only the legal title but also the beneficial interest in the property without the mortgagee's consent.
Money laundering
Due to the varying mortgage rates between personal and corporate lending, the writer is aware that some advisers encourage their clients to enter into a declaration of trust as part of the incorporation process of a property portfolio. The writer’s understanding is that the individuals hold the properties on behalf of the new beneficial owner (i.e., the company). The motive behind this seems to be twofold: firstly, so as not to disturb any existing lending on the property; and secondly, so as not to disturb the title registration at the Land Registry.
However, many lenders now expressly prohibit using a declaration of trust or any similar document that interferes with the legal or beneficial ownership without their consent.
If the lender's terms and conditions prohibit the use of the above, and in entering into such a document, the client received a financial benefit (i.e., a lower interest rate), this benefit would be deemed proceeds of crime under the anti-money laundering regulations. As such, it would be a reportable offence, and not reporting this would also be a criminal offence.
Practical tip
The key point to remember is short and to the point: always check the lender’s terms and conditions!
