Declaration of Trust – How Can You Take Advantage?

A Declaration of Trust is a relatively simple deed that, when deployed correctly, can add value in several wealth planning situations.

In its simplest form, a Declaration of Trust allows an individual to declare that they hold an asset, or assets, on trust for the benefit of one or more beneficiaries.

Here are just two ways that a Declaration of Trust can add value to your wealth planning:

Optimising property income

A Declaration of Trust can be used when you are looking to optimise the income you receive from a rental property.

Consider the example where a couple jointly own a rental property but have different levels of income. Spouse A is a higher rate taxpayer, whilst the other (spouse B) has a lower income well within their personal allowance.

In this case, HMRC would usually treat any income generated by the rental property as split equally between the two spouses and in line with the legal title. This would cause spouse A, the higher earning spouse, to pay tax at the higher rate on their share of that income.

In this scenario, a Declaration of Trust could sit behind the legal title, allowing the couple to nominate who holds the beneficial interests in the property and therefore who receives and declares the income.

This allows the couple to allot the rental income to spouse B, who will pay tax on it at a lower rate and therefore maximise the net income they receive from their rental property.

Points to note

• A Declaration of Trust can still be used even when one spouse owns a property in their sole name.
• A Declaration of Trust will also impact upon who is liable to pay capital gains tax in the event of a sale. With this in mind, it might be appropriate to remove the Declaration of Trust prior to sale so as to ensure both parties can fully use their CGT allowances.
• There are added complexities to consider if the property in question is subject to a mortgage which are beyond the scope of this article.

Protecting a deposit

Another way to use a Declaration of Trust is when helping your children get on the property ladder.

For example, a common situation is where you are helping your child buy a property with their partner and providing them with a deposit. However, you are also keen to protect the monies in the event your child and their partner (married or unmarried) were to separate.

In this scenario, a Declaration of Trust would set out that those monies provided would be returned to you in the event of a house sale.

It avoids any disputes or claim to that capital where the property is held in joint names and it also provides more control and protection when compared to an outright gift which you lose any influence over.

Points to note

• If you decide to use a Declaration of Trust, rather than making an outright gift, this money may well impact on the value of your estate and IHT position should anything happen to you.
• Where there is a mortgage involved it is important to take advice as to how best to set up a declaration of trust.
• Should you decide to gift those monies later, the Declaration of Trust can be removed thus turning what was effectively a loan into an outright gift.

Summary

It is important to remember that every situation is different and therefore these types of planning often require bespoke, and nuanced advice to ensure you understand the potential advantages and disadvantages of each approach.

If you would like to discuss this in more detail, please do not hesitate to contact us. Whilst we do not prepare Declarations of Trust for our clients, we often highlight their benefits. We work closely with several professionals who can advise on and establish these arrangements.

Written by Philip Feast