Planning on buying a buy-to-let property with your spouse or civil partner? Then you need to know about a Trust Declaration.
When a buy-to-let property is acquired by a married couple or those in a civil partnership, HMRC assumes any revenue and profits is spilt 50:50 between the partners. Tax is then charged on these profits on an equal basis.
But where one partner is a higher rate taxpayer and the other is a standard or non-taxpayer, things change. In such cases, it may be beneficial to alter the percentages so the maximum tax savings possible are made by the couple.
The good news is that HMRC allows you to do this – but you have to follow the rules.
Trust Declaration and Form 17
A Trust Declaration is required together with HMRC Form 17. This provides the most benefit in tax savings where the rental income is allocated to a spouse or other person in a lower tax band, or in circumstances where the personal allowance has not been fully utilised.
The only circumstances in which a Trust Declaration would be of no benefit is if the rental profits fall within the personal allowance of the property owner.
Tax savings can be substantial, particularly now that finance expenses are only allowed as tax relief at 20% against rental profits.
A Trust Declaration allows you to allocate your rental profits to a spouse or civil partner to maximise any potential tax savings that are available. The Trust Declaration is completed by you and your signatures witnessed. The original is retained by you and a copy is sent to HMRC along with their Form 17. Your rental income can be allocated according to your Trust Declaration from the date of signing the document.
Client case study
Mr and Mrs T have 3 rental properties. Mr T is a higher rate taxpayer and was paying 40% tax on his 50% share of the rental profits. Mrs T is a standard rate taxpayer and adding in the revised profits from an increased change in percentage ownership, she will still be a standard rate taxpayer. Tax savings are substantial: 20% of the higher rate tax will not be paid, almost £3,000. Using the £1,000 allowance for rental income, Mr T is generating a further £400 saving in tax.
Using a Trust Declaration and completing Form 17 can be quick and simple. We can help you produce the declaration, which is acceptable to HMRC and complete Form 17 with the change in percentages that will suit your circumstances to maximise your tax savings.
Contact us on 01642 927265 and we will see if this helps you save tax.