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How to use a Declaration of Trust to protect your assets

Written by: Kelly Greig
If you’re entering into a financial arrangement with someone else but want to protect your individual assets and contributions, a Declaration of Trust may be a sensible option.

Here are six reasons where it makes financial sense to use a DoT:

1) To declare ownership for another

A DoT allows the legal owner of an asset to declare they hold a percentage of the asset or the entire asset on trust for the benefit of someone else who then owns a beneficial interest even though they’re not on the title.

2) To show contributions to the purchase and shares owned

A DOT allows two or more people buying a property, most commonly couples, to confirm the exact amount each has contributed to the property and the ownership percentages each then has. For example, it can record the ownership as being 60/40 if say 60% was paid by one buyer.

Where couples are contributing significantly different amounts to the purchase price, this document is vital. If the couple were to separate and the property is sold, this document confirms how the proceeds of sale should be divided.

3) To set out details about how joint owners own the property

For example it can provide a ‘sale protocol’, setting out the procedure for the sale which again can play a crucial role in an acrimonious split. The DOT can therefore save an awful lot of time and money in arguing how the proceeds should be split, and even the circumstances in which it can be sold, when a relationship has broken down.

The costs of the DOT can save larger legal fees in the future. Although the Land Registry Transfer document can record the ownership as being in unequal shares, it offers no opportunity to provide any substantial detail and it doesn’t record specific contributions or provide a for sale protocol. It is therefore no substitute for a DoT.

4) To enable more than four people to share property ownership

The Land Registry Title only allows four people to be registered as the legal proprietors of the property. A DoT is therefore vital where more than four people are entitled to a beneficial share in the property. This is common where properties are inherited and there are more than four beneficiaries.

5) For tax planning reasons

A DoT can be used to vary the entitlement for income received jointly. If one spouse is a basic rate taxpayer and the other pays tax at the higher rate (40%), then it is advantageous to prevent jointly owned income being split 50/50 as is otherwise presumed.

For example, a DoT for a jointly owned rental property can state the income received should be split in unequal shares (e.g. 90/10 or 99/1) to make use of the income tax allowance and the basic rate. It is vital that notice of this arrangement is given to HMRC within a fixed time limit of 60 days, and that the income is actually split in the percentage recorded in the DoT.

6) To make a lifetime gift

This is common for second properties where parents wish to gift a percentage of the property to their children. By doing this by DoT the children don’t have to be recorded on the legal title to the property. Again, if this is a rental property it is vital the children receive the same percentage of income.

A DoT can also assist in lifetime planning where an asset is owned by one spouse only. That spouse can enter into a DoT saying they hold the asset on trust for the benefit of themselves and their spouse in equal shares. Both spouses can then make a lifetime gift of that asset. This enables both spouse’s annual allowance for Capital Gains Tax (CGT) and both spouse’s Inheritance Tax Nil Rate Band’s to be used in order to mitigate the tax implications of the lifetime gift.

There are many tax implications of making a DoT, not least any gift is a disposal for CGT which may result in tax liability even though there is no ‘sale’. Proper advice on the tax consequences, as well as the legal aspects, is essential.

Kelly Greig is tax, trusts and estates partner at Irwin Mitchell Private Wealth

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